Rental yield
Rental yield is a measure of how much cash an income generating asset can produce each year as a percentage of that assets value.
For example, say you own a rental property valued at $1,000,000. Standard rental yields can range between 3 to 7 percent per annum. From these two figures we can calculate the rental yield you can expect. As the owner, your potential cashflow could be $30,000 – $70,000 per year; or $576 – 1346 per week. This is calculated as follows:
$1,000,000 x 3% = $30,000 / 52 = $576
$1,000,000 x 7% = $70,000 / 52 = $1346
There are two types of yield, gross yield and net yield. Gross yield includes taxes and expenses. Expenses can be insurance, repairs and maintenance, management fees, etc. Net yield on the other hand excludes expenses. To calculate, list the income you expect to make from your rental annually, minus all expenses. This figure is the net amount. Then, divide the net amount be the value of the property. Here’s an example:
| Income | Annually | |
| Rent collected | $450 per week | $23,400 |
| Expenses | ||
| Rates | $2,300 | |
| Insurance | $80 per month | $960 |
| Repairs and maintenance | $1000 | |
| Management fees | 9% | $2,106 |
| Net Income | $17,034 | |
| Property Value | $550,000 | |
| Net yield (net income / property value) | 3.10% |
Capital Growth
Capital growth is simply the increase in value of the property over time. However, it can work both ways; property can also depreciate.
For example, say you purchased a property for $1,000,000. After 5 years you decide to sell. The property is now valued at $1,100,000. The capital growth is $100,000 or 10 per cent.
In the long term, house prices tend to trend upwards. In the short to medium term house prices can fluctuate, which makes predicting price very hard and highly speculative. Therefore, investing for capital growth is generally best for a longer-term investment approach.
