Rental properties can be a great asset as they provide steady income and are an excellent investment. The rental yield will be a major factor in determining whether property investment is successful.
Renting property is a great way for wealth building if done properly. Investors must plan well and be committed to their financial goals.
- What is rental yield?
- What are the types of rental yield?
- Which suburbs offer the highest yields in Australia?
- How do you know if you picked a good investment property?
What is a rental return?
One of the most important factors property investors need to consider before diving in is the property’s potential return or its rental yield.
Experts define rental income as future income from investment properties. It is often calculated as an annual percentage based on the property’s cost or market value. Remember that capital gain does not count as rental yield.
What types of rental yields are available?
Yield can come in many forms. It is important to understand the differences between them in order to be successful with investment.
Gross rental yield
This is the annual rental revenue of an investment property before expenses. This is done by multiplying the annual rental income with the property’s worth and then multiplying it by 100.
Here is an example calculation of a $650,000 house with a weekly rental at $350.
Gross rental yield: ($350 x 52) = $18,200 / $650,000 x 100 = 2.8%
Net rental yield
This is the income an investment property generates after subtracting expenses. These expenses include stamp duty and legal fees, as well as building inspections. These expenses also include rental-related expenses like advertising and income loss due to vacancy. Management fees, insurance premiums and repair and maintenance costs are also included in the calculation.
The annual rental income and expenses are used to calculate net yield. The difference is then divided by the property’s value and then multiplied by 100.
Here is an example calculation of the property with $4,000 expenses.
Net rental yield: ($18,200 – $4,000) / $650,000 x 100 = 2.18%
Return or total yield yield
A return is the sum of all gains or losses over time on an investment. Capital gain is also included. Unlike yield, which is reliant on the property’s market performance, return is focused on the investment’s future earning potential.
Many experts disagree with the idea that the rental yield should not always be considered when considering property investment. Experts also believe capital growth is key to building a sustainable portfolio.
High rental yield properties are the best choice for investors looking to increase their cashflow. Rent income is dependent on stability. Investors should aim to achieve a gross rent yield at least 5.5%.
Which suburbs offer the highest rental yields
High-yield rental properties can be found in areas with low property costs and high rental returns. These areas are often located outside of major capital cities, which tend to have higher property prices and lower yields.
Your Investment Property identified the top three suburbs in each state with the highest rental yields, and the lowest prices.
Type of property
Gross Rental Yield
|New South Wales||Warren (H)||H||$162,500||9.6%|
|Sussex Inlet (H).||H||$600,000||9.7%|
|Sussex Inlet (U).||U||$507,500||9.3%|
|Northern Territory||Tennant Creek (H)||H||$260,000||8.4%|
|South Australia||Port Pirie West (H)||H||$110,000||10.9%|
|Port Augusta (H).||H||$160,000||9.4%|
|Victor Harbor (U).||U||$308,000||9.9%|
|Western Australia||Kambalda East (H)||H||$85,000||12.2%|
|Kambalda West (H)||H||$145,000||10.0%|
|ACT||Denman Prospect (H)||H||$604,000||9.5%|
How can I determine if I have made the right choice in an investment property?
Experts agree that the best property can make or ruin an investor. You must be meticulous and plan when looking for the right investment property.
These are indicators that you’ve chosen the right property to rent.
A property’s location has a major impact on the rental demand, tenant quality, and rate of returns. If the property is in a high-growth location, these factors will be more important.
High-growth areas are characterized by a growing population, close proximity of public amenities, and a vibrant job market.
2. The property’s condition
Before purchasing a rental property, it is advisable to inspect the house thoroughly. This will help you determine if the home is in good condition.
The property should be tenant-ready as repair and maintenance expenses can eat into an investor’s funds and can have a huge effect on cash flow.
3. Listings and vacant positions
An area with fewer vacant properties and listings generally indicates a strong rental sector. Low vacancy rates allow landlords to raise rent prices in order to increase their returns.
4. Positive cash flow
Strong positive cash flows should be possible for rental properties. This means that the rental property should be able to generate more income per month than the landlord invests.
5. Potential for capital growth
Renting out properties should provide income for investors, as well as cash flow.
The most common way to measure profit is with cash on return. This takes into consideration how the investment property was funded. Experts believe that a rental property offering a high return could earn cash around 8%.