How to Calculate Rental Yield
Rental yield measures the annual return on a property investment as a percentage of the total amount invested. It is one of the most important metrics for evaluating whether a rental property makes financial sense. There are two versions: gross yield (before expenses) and net yield (after expenses).
Gross vs. Net Rental Yield
- Gross yield = (Annual rent ÷ Total investment) × 100. Quick and easy to compare across properties.
- Net yield = ((Annual rent − Annual expenses) ÷ Total investment) × 100. More accurate reflection of actual return.
- Total investment = Purchase price + buying costs (stamp duty, legal fees, surveys, etc.).
- Annual expenses typically include property management fees, insurance, maintenance, rates, and letting agent fees.
Net yield is the more meaningful figure because it accounts for the real costs of holding and managing the property. A property with a 7% gross yield but 3% of annual expenses has a net yield of around 4%, which is a very different proposition.
What Is a Good Rental Yield?
There is no universal answer — what counts as a good yield depends on your market, investment goals, and how you finance the property. Here are general benchmarks investors use:
- Above 5% gross yield: Generally considered strong in most developed markets, providing positive cash flow.
- 3–5% gross yield: Common in major cities like London, Sydney, or New York, where capital growth expectations compensate for lower income returns.
- Below 3%: Often seen in prime urban areas; the investment case relies heavily on long-term price appreciation.
- Net yield above your mortgage rate: A basic test for positive gearing — your rental income covers your costs.
Frequently Asked Questions
What expenses should I include in net yield?
Include all recurring costs of holding the property: property management fees (typically 8–12% of rent), landlord insurance, council rates or property taxes, maintenance and repairs (budget 1% of property value annually), body corporate or HOA fees if applicable, and letting agent fees. Do not include mortgage principal repayments, as these build equity rather than representing a pure expense.
Should I include buying costs in my yield calculation?
Yes, including stamp duty, legal fees, inspections, and any immediate renovation costs in the total investment gives a more accurate yield figure. Investors who ignore buying costs overstate their actual returns, which can lead to poor investment decisions.
How does vacancy affect rental yield?
Vacancy periods reduce your effective annual rent. If your property sits empty for four weeks per year, your effective annual rent is 92% of the advertised rate. Conservative investors factor in a 4–8% vacancy allowance when calculating expected net yield.
