How to calculate rental yield - Pearl Financial

How to calculate rental yield

By Shane | Investing

Sep 10

Whether you’re a seasoned property investor, or you’re just getting started on the property investment journey, then you’ve probably heard the term ‘rental yield’. Read on to discover what rental yield is and how to calculate it.

Understanding the rental yield of a property helps you assess the income and cash flow potential of that particular property.

What is ‘rental yield’?

Rental yield is a measure of the income that a property generates each year as a percentage of the property’s value. Since the formula can be applied to all properties that generate an income, it can be used to compare investment opportunities.

It’s important to remember that capital growth isn’t considered in the rental yield calculation.

How to calculate ‘rental yield’

There are two numbers you need to be able to calculate rental yield:

  1. The annual rent that the property will receive (if you only know the weekly rent, take that number and multiply it by 52 e.g. if the property rents for $500 per week, then the annual rent will be $500 x 52 = $26,000)
  2. The value of the property

Once you have these two numbers, you can plug them into the following formula:

Gross Rental Yield = Annual rent / property value x 100

Let’s work through an example.

Assume you have a property valued at $500,000 that is currently rented at $500 per week. We have already calculated above that the annual rent in this scenario is $26,000 so all we need to do is plug the value into the formula. Therefore:

Gross Rental Yield = $26,000 / $500,000 x 100

Gross Rental Yield = 5.2%

This means that the property generates income equal to 5.2% of the property’s value.

Is Gross Rental Yield the same as Net Rental Yield?

Nope, gross rental yield doesn’t take into account the expenses of the property. This means that if a property has a high rental yield but also has high expenses then it’s net rental yield may not be the same as a comparable property that has lower expenses.

I will run you through how to calculate Net Rental Yield in another article.

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About the Author

Shane specialises in helping Gen Y professionals and business owners make an impact by accumulating more assets, generating more income, and having more time to enjoy life. He has a Master of Applied Finance, an MBA, and a Master of Financial Planning. He is also a terrible golfer.

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