Finding a great investment property is an exciting task.
Of course a key component of the assessment criteria for an investment property is calculating the potential rental yield, meaning the return on the money invested to purchase the property.
The yield from a rental property is basically the rate of return from your investment, excluding any tax considerations.
To work out the GROSS rental yield, you can divide the annual rental income from the property by the purchase price and multiple by 100 to get the percentage rate of return.
For example, if you purchased a property for $4,000,000 and were receiving $20,000 per month / $240,000 per year in rent, your yield would be 6%.
To work out the NET rental yield, go through the same exercise, but just deduct your expenses from the rental income first.
Your overall return is influenced by other factors including:
What should you include as expenses?
Expenses for your rental yield calculation should include real estate property management fees, apartment complex management fees, insurance, repairs and maintenance.
You can also allow for some vacant periods between tenants. A good yardstick is to estimate 15% of the rental income for expenses.
Having worked out the rental yield for a particular property, you can compare it against the potential rental yields available from other investment properties to help you decide which offers the best opportunity for you and whether you should proceed.
A low return may mean that alternative investments should be reviewed, whilst a very high relative yield may mean there is an accompanying risk factor that’s higher than normal (this is particularly relevant to investments with guaranteed rental returns and investments in serviced apartments).
A word of caution; Yield is not everything, and areas that produce lower yields usually do so because of rising property prices, which in turn produce a higher capital gains on the property.
When investing in property, planning to hold the property a minimum of five years is always a reasonable strategy, and will help to smooth out the economic cycles and changing conditions along the way.