How to Calculate the Rental Yield of an Investment Property
What is Rental Yield?
Rental yield is a critical metric for property investors. It helps determine how much income your property generates relative to its purchase price, in other words, it's a measure of your return on investment (ROI) from rental income alone.
The formula is:
Rental Yield (%) = (Annual Rental Income ÷ Purchase Price) × 100
This gives you a percentage that makes it easy to compare the income performance of different properties, regardless of their price tags.
Why It Matters
Benchmarking: Rental yield gives you a snapshot of how well your money is working for you.
Comparing Markets: It helps compare suburbs or properties with different values and rental rates.
Cash Flow Planning: High yield = potentially stronger positive cash flow (more income than expenses).
Portfolio Strategy: Investors may choose high-yield properties for cash flow or lower yields in high-growth suburbs for capital gain.
Typically, a gross rental yield between 5% and 6% is considered strong in many Australian markets. Lower yields might still be acceptable if the property has strong capital growth potential.
Example Calculation
Let’s break it down with numbers:
Purchase Price: $500,000
Annual Rental Income: $30,000
Apply the formula:
($30,000 ÷ $500,000) × 100 = 6% Rental Yield
What This Tells You
A 6% rental yield means the property generates a 6% return on its purchase price through rent alone, before accounting for expenses like rates, insurance, or maintenance.
This is considered a solid yield, indicating the property may deliver:
Strong cash flow
Shorter time to pay off the mortgage (if rent covers costs)
Less reliance on future capital growth to make the investment viable
Pro Tip: Gross vs Net Yield
Gross Rental Yield: Based only on rental income and purchase price (as shown above).
Net Rental Yield: Takes into account ongoing expenses like council rates, insurance, property management fees, etc.
Net yield is more accurate for comparing profitability.
