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If you’re looking to invest in a property it’s important to understand what rental yield is and how it works, to ensure a good return. Rental yield helps you determine a property’s value and potential, whether residential or commercial. Keep reading to find out whether your investment property has good rental yield.
Rental yield measures the profit you generate each year from your investments as a percentage of its value. Investors use their rental yield to evaluate the income they profit from their investments and to compare properties. A high rental yield equates to a greater cash flow.
There are 2 types of rental yield: gross and net.
To calculate the gross rental yield of a property, divide your annual rental income by the property value and multiply that figure by 100. The property value can be the amount you bought it for, or its current market value.
You purchased a property for $950,000. The weekly rent on your property is $500. Multiply this figure by 52.
500 x 52 = 26,000
Gross rental yield = (annual rental income/property value) x100
Gross rental yield= (26,000 / 950,000) x 100
Gross rental yield= 2.74%
To calculate the net yield on your property, factor in your expenses. This can provide you with a clearer understanding of the income return on your investment.
Your investment property expenses may include:
Your annual expenses are calculated by adding together the above figures that apply to you.
Following the previous example, you might calculate an annual expense of $4000.
Net rental yield = [(Annual rental income - annual expenses) / total property cost] x 100
Net rental yield = [(26,000 - 4000) / 950,000] x 100
Net rental yield = 2.32%
Keeping an eye on the property market can help you understand the implications of a rise or fall in prices on your rental yield. There are many factors that can influence the yield on your property. This includes property prices, infrastructure, location or vacancy rates.
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Since there is no definite ‘good yield’ percentage, it all comes down to each property’s various features. It’s easy to assume that a higher rental yield means a higher return or a greater property value, but this may not always be the case.
Typically, a property with a high rental yield implies that it is undervalued or below market value. This is usually considered to be between 8-10%. While a property with a low rental yield, which is anywhere between 2-4%, can mean that it is overvalued.
As an investor, high rental yields are better because they usually generate a steady cash flow. Investors generally aim for properties with a rental yield above 5.5% because of the stability in rental income. For potential home owners, looking at median rental yields across the country can help to determine what your interests and ideal outcomes might be.
Understanding what rental yield is and how it is calculated can help to determine your potential profits and losses on a property you already own or on one you’re looking to invest in. Evaluating and comparing property values and their respective rental yields can be useful to invest your money wisely and realise your home owning dreams.
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