When looking to invest in property you want the best return in terms of cash flow and capital growth.
In today article we’re going to look at Rental Returns…Net rental yield versus gross rental yield.
Gross Rental Yield:
It’s fairly easy to work out the gross rental yield on a property.
You take the predicted weekly rent, times it by 52 (weeks of the year) and divide it by the price of the house…
$450 (rental return) x 52 (weeks) / $350,000 (house price) (x 100)
Therefore, the gross rental yield is 6.6%
To ensure your property is going to be cash flow positive, that is, provide you with an income after tax, you should be focusing on suburbs or properties with an average gross rental yield of 7%+.
Net Rental Yield
Net rental yield refers to the rental return you are going to get once all expenses are deducted from the property, and with this you can work out whether the property is going to be positively or negatively geared.
- $450 x 50 weeks per annum = $22,500
- Interest – $389,250 x 0.46 (interest rate of 4.6%) = $17,905
- Body corporate per annum = $1716
- Rates per annum = $1664
- Property management – $22,500 x 0.07 (property management fee of 7%) + $450 (one weeks rent) = $2025
- Landlords insurance = $370
- Building insurance – covered by body corporate fee = $0
- Maintenance = $500
Put simply, you take the predicted rent per week, times it by 52 again, minus all the costs associated with holding the property (i.e. mortgage, property manager fees, water / council rates, etc). You then divide this figure by the purchase price of the house, including all of the costs involved with buying a property (stamp duty, solicitor, etc).
It is obvious that the net rental yield percentage is going to be lower than the gross rental yield.
It is important to understand that the lower the rental yield percentage, the less likely the property is going to be cash flow positive.
Check out our article how to turn a negatively geared property into a positively geared property, to better understand the ways that you can reduce your expenses or add value to your investment property.
It is not just about the gross or the net rental yield when it comes to buying an investment property.
You also need to factor into account vacancy rates – the period of time an average property in a suburb is vacant over a 12 month period.
It is imperative you look at the average vacancy rates when selecting a suburb.
At Pumped On Property we try to avoid buying anywhere where vacancy rates are higher than 2%.
It can often be smarter to buy an investment property with a lower yield (5-6%) in a suburb with lower vacancy rates (<2%), than having a yield of8%, 9% or 10% in an area where vacancy rates are higher (3%+).
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