How to weigh up the value of a property’s rental yield

Purchasing residential real estate and renting it out is an extremely popular method for Australians to earn supplementary money. Whether you’re renting to students near a campus or families in a neighborhood, it’s essential that you price your property accordingly. If you ask for too much money, you’ll have a hard time finding tenants, leaving the property vacant and costing you money each month. However, if you charge too little, you may not see the financial benefits that make the property a worthy investment.

Rental yield is the amount of money that you make on your investment property. It’s calculated by adding up the costs of owning and maintaining the property and comparing them to the amount of rent you can charge to tenants. A large yield means you are pocketing more money each month, while a smaller yield may mean you may need to reconfigure your investments or cut it loose altogether.

Calculating your rental yield

In a few simple steps, you can calculate your rental yield. You simply need to know what you are charging your tenants each month and the value of the property:

• Figure out the annual rent that you can charge your tenants. Simply multiply their monthly rent by 12 to get this figure.
• Divide the annual rent by the value of your property.
• Multiply that figure by 100.

The final figure will be a percentage that represents your gross rental yield.

In most parts of the country, your gross rental yield should range between 3 and 5 per cent, though it might be higher outside city centres. Generally, investments in areas with lower housing costs will yield higher rental yields.

What else do you need to consider?

Generally, it’s clear that a higher rental yield is desirable, as it puts more money in your pocket. However, there’s more to real estate investing than that.

For example, as the landlord of a piece of residential property, you are responsible for routine maintenance of the house, as well as any emergency repairs that might come up. It’s helpful if you are handy yourself and can take on the bulk of issues without hiring a handyman, but there are still the materials to consider. Plus, some issues – like those dealing with the house’s wiring, roofing, or some plumbing repairs – should be left to the pros, lest you do even more damage by using the wrong part or not spotting a larger problem.

No matter how handy you are, it’s important to keep a rainy day fund, because there is always a risk of an unexpected expense springing up at the last minute.
In addition, it’s important to consider the long-term financial investment of the home you bought to rent out. Though real estate is generally a sound investment, the financial crisis of 2008 is a grim reminder that there are no guarantees in the financial world.

One way to avoid ending up with an overvalued home is to be aware of the neighbourhood around your property. Many investors buy homes that are in need of renovation so they can make the repairs and then ask for a higher rent price from tenants. And while that may be a way to increase your income, be wary of installing state-of-the-art appliances or flooring that’s as high quality as it is expensive. You may have trouble renting out a premium home in a less desirable neighborhood. Plus, if you need to sell, you may find that you are unable to sell the home for your asking price for the same reason.

For more insights related to commercial endeavors, consult with the experts on our team.