What to account for when calculating yield

20-Mar-2014

As 2014 dawns, the media is once again full of expert projections for property price growth in Sydney that's encouraging early buyer activity. But for those considering investment in Australia's capital city property market, understanding how to calculate yield is one of the cornerstones of effective decision making.

Firstly, the definition of rental yield is the measurement of the income produced by an investment property as a percentage of the property's value. There are two types of yield - gross and net.

Gross yield is the simplest to calculate; take the annual rent for the property and divide it by the asset's value. If the rent is $400 a week ad the property is valued at $500K, the equation will be (400*52) / 500,000 = 0.042%. Gross yield is often the figure quoted on properties being pitched to investors, but in fact, the net yield is more telling.

Net yield is harder to calculate, but takes into account all of the other costs associated with the property, apart from the mortgage cost or any applicable tax. This is because these costs are variable, depending on the personal circumstances of the individual investor.

Generally speaking, when calculating net yield, investors should factor in a reasonable vacancy rate, commonly at least 2%. Additionally, other direct costs such as insurance, management fees, strata levies (if applicable) and council rates should be deducted from the total income, as well as an allocation for repairs and maintenance, according to the state of the property.

There's plenty of conjecture over what constitutes a good yield with property. It used to be that a 10% yield was considered to be the rule of the thumb, but the last time yields were widely recorded at that level, interest rates were also in the double digits. While still a valuable indicator, ultimately, rental yield is only one factor of property investment, with many investors prepared to compromise on short term yield for longer term capital gain (the increase in the property's value over time).