# How to calculate rental yield ?

#### aussieB

Hullo,

I read this from the forum archives and wanted to ask a few questions

How do most of y'all calculate rental yields before investing in a property ? And what is usually an acceptable/good yield percent ?
Is rent x 5200 divided by price an accepted way of calculating in today's property market scenario ?
Also, how much does yield weigh when you decide whether you want to buy a property (in a buy and hold strategy) ?

Cheers,

This is my method - I take roughly 48-50 weeks a year, depending on demand.

Then I deduct 25-35% for rates, expenses, body corporate etc depending on the type of property.

E.g. \$500p/w, I will use 48 x 500 x 0.75

I use this to calculate my yield.

How do most of y'all calculate rental yields before investing in a property ? And what is usually an acceptable/good yield percent ?
Is rent x 5200 divided by price an accepted way of calculating in today's property market scenario ?

Gross Yield = Annual Rent/Purchase Price x 100.

Also, how much does yield weigh when you decide whether you want to buy a property (in a buy and hold strategy) ?

To me, its a choice depending upon current financial position based around personal risk profile.

Early on in our investment journey we had minimal disposable income to put towards IP holding costs, so we tried to maximise our rental yield a much a possible. Our start out minimum yield requirement we chose was 6-6.5%.

Later on down our investment road as our incomes increased (rental & Payg) along with our equity we could afford to relax our yield requirement down a little to 5%.

Equity levels though were our greatest buffer via LOC's we could use to offset any IP negative cash flow.

I hope this helps.

(Rent minus rates, land taxes, repairs, expenses)

/

(Purchase price + stamp duty + legal fees + renovations)

That's your true yield. Most people who tell me they get 6-7% yield these days actually only means 3-4% in my books.

(Rent minus rates, land taxes, repairs, expenses)

/

(Purchase price + stamp duty + legal fees + renovations)

That's your true yield. Most people who tell me they get 6-7% yield these days actually only means 3-4% in my books.

if you were serious about this you would divide by current market value (not purchase price+ +), but very few people on this forum understand the concept of opportunity cost...

You need to be constantly evaluating your investments against the next best option.

You can do all sorts or fancy calculations like pointed out, but I like to keep it simple, because all you generally really use this yield figure for is for comparing somewhat similar properties. You're usually not looking at old 4 bedroom houses and at the same time at a luxury penthouse. So the formula is as follows:

Yield = Weekly_Rent * 52 / Purchase_Price

if you were serious about this you would divide by current market value (not purchase price+ +), but very few people on this forum understand the concept of opportunity cost...

You need to be constantly evaluating your investments against the next best option.

If you were serious about this you would access an increase in your equity, and have compounding opportunity gains, which actually increases your yeids on the original investment sum. It is what it is all about. You can still use capital gains to invest.

For purchase price do you use cost of property plus fees, stamp duty, conveyancing and any interest charged during the contract period?

For purchase price do you use cost of property plus fees, stamp duty, conveyancing and any interest charged during the contract period?

Dont get too hang up on what to include.

Yield is purely a calculation for a 'quick' comparison of 2 or more IP's.

Gross yield is the quickest less complicated method. Annual Rent/Purchase Price x 100.

Then if/when the time comes to go more depth into working out an IP's income/expense/tax implications etc bottom line to hold the property you run it on a IP analysis program such as PIA etc.

I also have created one in my free tools, that can be downloaded below.

I hope this helps.

if you were serious about this you would divide by current market value (not purchase price+ +), but very few people on this forum understand the concept of opportunity cost...

You need to be constantly evaluating your investments against the next best option.

True. I do that all the time actually.

Current net rent

/

Estimates sale costs less transaction costs and taxes

If you're sitting below 5%, there is reason to evaluate whether you should liquidate your portfolio. Gross yield is a massively flawed concept because it only allows you to compare very similar properties. You can't compare:

a) different types of properties
b) different types of jurisdictions
c) other investment classes

The most standard calculation is annual rent/property value * 100 = Gross Yield.
Then based upon that I usually subtract a percentage based upon the dwelling type. For example old = higher maintenance, unit = body corporate fees and so on.

I also disagree with adding other costs such as stamp duty into a yield calculation, prices increase and decrease overtime and these costs would change.
As an investor you should review your portfolio regularly and under performing propeties assessed as to whether they should be moved on for something better.

For example a 500k property returning \$500 a week.
\$26,000/\$500,000 = 5.2% yield.
If that property increased to say \$700,000 but the rent in that time only went up say \$50 then the new Yield would be 4.0%.

If the calculation is "before investing", then it depends on what you are doing the calculation for. If I am doing a calculation to find out my actual financial position after investing, then it will be after I have decided which of the investment choices has the best return, and I will go into quite fine detail including agent's commissions, land tax, stamp duty, etc etc etc.

When I am trying to work out which of a motley bunch of potential purchases stacks up best, I use a much simpler "sniff-test" formula for an estimated total economic return.

ETER = (Annual rent - actual body corp (if any) - actual rates - actual land tax - some estimate of annual repairs + VG land value*.08)/Purchase price

This will actually vary surprisingly widely and definitely sorts out the wheat from the chaff - I have found it very useful. It will get you down to 1-3 possible choices if you look at 10-15 properties in my experience. But it is just a number, not a yield.

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