Before you make the jump to become an investor, you will want to determine the yield of the property to see if it is a worthwhile investment.
Even though some investors will buy property for various – whether it be to land bank, future infrastructure potential or personal lifestyle reasons – most of them are only focused on the property’s current return and the potential yield.
But before we can dissect how you can calculate a property’s yield, we need to explore some terminology.
Property investment can be an uphill battle at the best of times. However, without having a grasp of the jargon used, it can become a far more daunting task. Firstly, we will need to explore the difference between return and yield. Here are the terms commonly used to describe the potential for a property investment, and so, both knowing and understanding these is fundamental to your success.
The yield is a measure of the future income of an investment property. It is typically calculated annually and expressed as a percentage, based on the property’s cost or market value. Yield does not have anything to do with capital gain.
Gross yield is the income of an investment property before any expenses are deducted. Some of these expenses can be significant, thus there can be quite a difference between the calculated gross and net yield.
Net yield is the income on an investment property after all the expenses are deducted. These expenses will probably include any purchasing and transaction costs, such as state based stamp duty, legal/conveyancing fees, pest and/or building inspections, any loan establishment fees, advertising, and rent lost through vacancy.
There could also be some repairs and maintenance costs, property management fees, various insurances, and council rates and charges. Often, the exact costs will be unknown to you until they are incurred and will have to make estimates.
Return or total return
Return is the total gain or loss made on an investment property, over a period. It includes any capital gains or losses and will be either expressed in dollar terms, or as a percentage from the profit (or loss) made divided by the investment cost.
In contrast, the return focusses on the property’s past performance, whereas the yield looks at its future earning potential.
How do you calculate yield?
To calculate a property’s net yield, first you subtract the property’s annual ongoing costs and costs of lost rent from the property’s yearly rental income. Then, you divide this figure by the property’s market value. Lastly, you multiply this figure by 100.
These three steps will give you the investment property’s yield as a percentage on an annual basis.
Gross yield = annual rental income (weekly rental x 52) / property value x 100
Net yield = annual rental income (weekly rental x 52) – annual expenses and costs/ property value x 100
Now neither of these will take into account any tax implications that you will have. Typically, the tax implications on a new property are far better than an older property because of depreciation. This can equate to quite a large return back from the ATO come tax time. However, you should talk to your Accountant for any tax advice.
For example, you decide to buy a property for $400,000. You are able to rent out the property for $475 per week, and have annual expenses totalling $5,675 ($1,075 on lost rent and advertising, $1,900 on property management fees, $1200 on insurance, and $1500 on council rates).
Your net yield would be = annual rent of $24,700 ($475 x 52) – annual expenses of $5,675 / property value of $400,000 x 100 = 4.75%.
Your gross yield would be = annual rent of $24,700 ($475 x 52) / property value of $400,000 x 100 = 6.18%
Many agents will quote yields on investment properties in their advertising. What you need to be aware of is that they will be quoting gross yields, not net yields, as it is a higher percentage. So ensure you enquire as to what type of yield they are quoting, and do your own due diligence.
Luke Jorgensen - Lush Property
Tags - Property Investment; Property Development; Renovation; Valuation; Valuer; First Home Buyer; Buyers Agent; Buyers Advocacy