Rental Returns…Net Rental Yield Versus Gross Rental Yield

Rental Returns…Net Rental Yield Versus Gross Rental Yield

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…

For example:

$450 (rental return) x 52 (weeks) / $350,000 (house price) (x 100)

=0.066

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.

For example:

Income: $22,500
  • $450 x 50 weeks per annum = $22,500
Expenses: $24,180
  • 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
Therefore in this example this property is negatively geared by $32 per week based on a 10% deposit and an interest rate of 4.6% before tax. To find your after tax cash flow position you will need a tax depreciation schedule and a meeting with your accountant.

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.

Vacancy Rates

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%+).

Looking for a property manager? Learn more about how we can help you here…

 

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Kristal Everingham

About

Kristal Everingham is a Property Acquisition Manager at Pumped On Property. Her mission is to show you how to replace your income through property investing so you can do what you love…full time.