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What’s a good ROI for a rental property?

By Greg Bell

When you own a rental property for the first time and you are trying to figure out a reasonable price at which to rent out the space, there are many things to consider. To truly understand the kind of return on investment you want, you'll have to crunch some numbers.

There is no single recommendation for what constitutes a good rental yield. Smart Property Investment explained that the issue will rely on a number of factors, including the type of property, where it's located and what the overall real estate market looks like. In general, the "right" yield will at least be enough to ensure a strong cash flow that covers all of the expenses related to owning the building,

Getting it right

As a general baseline, you might want to aim for a yield of at least 4-5% of your initial purchase price each year. For instance, if you bought a property for $1 million, it should return at least $40,000 per year in rent. Again, that number can be highly flexible, and it depends on a number of different factors that fluctuate from one year to the next, but over a long enough timeline, that number is on the lower end of what you should aim to recoup.

Again, that varies based on several issues (residential rentals tend to yield less than commercial ones, for instance). Likewise, if you just got a good price on a property for some reason, you may enjoy higher yields.

Gross vs. net yields

When we're talking about rental yields, it's important to know the difference between "gross yield" and "net yield." Lendi cautioned that the former means rental income divided by property value, while the latter is rental income divided by all the money you as the owner spend on the property each year: These expenses include mortgage payments, insurance premiums, legal fees, maintenance costs, ongoing expenses, stamp duties and so on.

It will be important to understand both of these factors and how they affect your overall return on investment.

When you're buying commercial real estate for the express purpose of renting it out, rental yield is among the many things you will need to consider. As such, you should have an experienced real estate professional by your side who can help you find the right property for your unique needs. Get in touch with the experts at Ray White Surfers Paradise today, and we can help you understand everything the right agent can do for you.

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