Rental yield is often cited as one of the most important elements for property investment success. Find out how you can maximise wealth-creation opportunities through the ‘cash flow strategy’:
Rental yield can be defined simply as the cash generated by your asset annually as a percentage of its value.
Working out your rental yield depends on the two main types of rental yield—gross rental yield and net rental yield.
Gross rental yield is your annual rent income divided by your property’s value, while the net rental yield takes into account the total property expenses including stamp duty, legal fees, loan fees, building inspections, repairs and maintenance, management fees, insurance costs and other rates and charges.
For a $700,000 property with a rental rate of $400 per week and a total of $5,000 holding cost, the computation would be:
Gross rental yield: ($400 x 52) = $20,800 / $700,000 = 2.97%
Net rental yield: ($400 x 52) = $20,800 - $5,000 = $15,800 / $700,000 = 2.25%
If you have not yet determined the actual price of the property, you can use the median price of properties in the suburbs to calculate rental yield.
Other types of rental yield include market yield and debt yield. Market yield is the total rental income over the asset’s current valuation, while debt yield is the total rent income against the size of the mortgage.
Chasing rental yield is not a strategy that would work for all investors.
In fact, experts advise against having rental yield as a sole consideration when investing in property. Ideally, investors must be able to marry rental yield and capital growth and sustain balance in their portfolios over the long term.
Properties with a high rental yield would be best for investors who are looking to improve their cash flow.
Right Property Group’s Steve Waters said: “A high cash flow where all the income takes care of all the expenditure gives you serviceability, which gives you time in the market because you’re not at the mercy of high-interest rate and market fluctuations.”
While there is no definite percentage that is considered as a ‘good rental yield’, but if you pay a high price for purchasing and holding a property, you must aim for a rental return high enough to offset the costs that you have to shoulder.
CoreLogic found that metropolitan suburbs, at their best last year, saw houses and units with five to eight per cent rental yields.
Meanwhile, Cohen Handler said that net yields typically go from -6 to 6 per cent and no higher.
For investors looking to rental yield potential as a deciding factor when purchasing a property, the Commonwealth Bank of Australia advised to aim for 5.5 per cent or higher.
According to them, if the gross rental yield potential of a property is at four per cent or below, chances are the property is overvalued for investment purposes. On the other hand, if the gross yield is 5.5 per cent or higher, the property could be undervalued or sold below market value.
Increase the rental yield on your property by implementing these strategies:
Properties with high net rental yields are ideal for risk-averse investors who want to afford peace of mind as their investment generates good cash flow and ultimately takes care of their loan repayments.
By having positive cash flow, investors can sleep at night knowing that they have a good buffer in case of interest rate fluctuations, vacancy, personal crisis other low-income periods.
However, this is not to say that properties with low net rental yields are automatically bad news.
Investors who seek to chase capital growth and implement a long-term buy-and-hold strategy in a sustainable market may benefit from properties with low net rental yields.
Mr Waters explained: “If you’re holding $2 million in assets, an annual rise of 5 per cent in value translates into $100,000 in the first year which continues to compound as the property price cycle runs its course.”
To succeed through this strategy, investors are advised to establish a steady stream of cash flow to sustain the portfolio during low-cash flow circumstances.
The following suburbs, divided per state, have the highest yielding rental returns across the property markets in Australia as of November 2018:
|Glen Eden||12.88%||Port Augusta||10.40%|
|Mission Beach||11.51%||Whyalla Norrie||9.75%|
|Blackwater||10.90%||Port Pirie West||9.51%|
|Mount Morgan||10.46%||Elizabeth Downs||9.30%|
|Herdman Cove||8.52%||Kambalda East||13.66%|
Check out Smart Property Investment's Best Suburbs page to find out the top-performing investment areas in terms of yield and growth.
The information has been sourced from the Commonwealth Bank of Australia, Cohen Handler, Domain and the Smart Property Investment website