Rental yield calculator

What rental yield is, gross and net

Rental yield is the rent a property earns in a year expressed as a percentage of what the property is worth: gross rental yield is annual rent divided by property value, and net rental yield is annual rent less annual expenses, divided by property value. Both are usually quoted as a percentage a year. Everything else written about yield is a variation on those two lines.

Worked through on an example: a $650,000 property renting at $600 a week collects $31,200 a year, a gross yield of 4.80%. Take out $6,000 of annual expenses and the net rent is $25,200, a net yield of 3.88%.

That is 0.92 of a percentage point between the two numbers on entirely ordinary figures. It is the gap that decides whether a property carries itself, and it is the reason the gross number on its own tells you almost nothing.

Which value goes in the box

Use what the property is worth today, not what you paid for it. If you bought at $450,000 and it is worth $650,000 now, the same $600 a week reads as 6.93% against the purchase price and 4.80% against today's value. Only the second one tells you whether the money is still working where it is.

What the gross rental yield calculator asks you for

Four inputs, and the last one is optional. Nothing is assumed on your behalf, which is why there is no default rate or benchmark expense figure anywhere on the panel.

1. 1

   Property value or purchase price

   Today's value for a property you already hold, or the price you are considering paying for one you do not.

2. 2

   Rent per week

   The rent actually being collected, or the rent an agent has appraised. If the appraisal is a range, use the bottom of it.

3. 3

   Annual expenses in dollars

   Council and water rates, strata levies, landlord insurance, management fees and maintenance, added up for the year.

4. 4

   Loan amount and interest rate, optional

   Leave these blank for a pure yield figure. Fill them in and the tool adds the annual interest cost and the weekly cash position after it.

The outputs run in the same order: annual rent, gross yield, expenses, net rent, net yield, then the weekly cash position before any loan. Enter a loan and two more rows appear underneath.

What a yield figure quietly leaves out

Yield is a snapshot of a good year. It assumes the property is tenanted for all 52 weeks, that nothing breaks, and that the tax position is somebody else's problem.

• Vacancy weeks between tenants, which are not in the rent figure you entered
• Letting and re-letting fees each time a tenancy turns over
• The loan, unless you fill in the optional fields
• Depreciation, which costs you nothing in cash but changes your tax position
• Your marginal tax rate, and how the property's loss or profit is treated against it
• One-off capital works, from a new roof to a hot water system

Vacancy is the one worth pricing yourself. Two empty weeks on that example property takes the rent from $31,200 to $30,000, and the gross yield from 4.80% to 4.62%. There is no vacancy field on the tool, so add the shortfall into the expenses figure if you want the honest version.

Yield and cash flow are not the same thing

Yield measures the property. Cash flow measures your bank account, and the difference between the two is the loan.

Keep going with the same example. Net rent of $25,200 a year is $484.62 a week before any borrowing, which looks comfortable. Borrow $520,000 at 6% and the interest alone is $31,200 a year.

That turns $484.62 a week coming in into $115.38 a week going out, a shortfall of $6,000 over the year. The net yield is still 3.88%. Both statements are true at once, and only one of them turns up in your account.

Why yield and capital growth pull against each other

The sum explains the trade-off on its own. Yield is rent divided by price, so anywhere the price runs ahead of the rent, the yield falls, and anywhere the price is held back the yield looks better.

That is why a high-yield figure and a high-growth story rarely sit on the same property at the same time. It is not a rule of nature, it is division.

So treat a high yield as a question rather than a prize, and go and find out what is behind it.

• Why is the price low relative to the rent, and who else is buying here
• How long do properties sit vacant between tenants in this market
• What is the condition, and what will the first two years of maintenance cost
• Is the rent supported by something durable, or by one employer or one project
• What would the yield look like if the rent came back to where it was three years ago

What a lender does with the rent

A lender does not count rental income at face value. It is commonly shaded, frequently at 80%, because the lender assumes vacancy and costs whether or not you have had either.

On $31,200 of rent that means $24,960 goes into the assessment and the missing $6,240 is income you are genuinely receiving that does nothing for what you can borrow. That gap is policy rather than an error in your figures, and it applies whether or not you have ever had a vacant week.

How far the rent is shaded, and how negative gearing is treated in the assessment, varies from lender to lender. Our borrowing power calculator explains that side of it and lets you see the effect.

The yields on this page are an estimate from your own figures, not a valuation and not tax advice, and no part of it is a loan approval. We compare a panel of more than forty lenders, so if a property stacks up on the numbers, come and talk to us about how to fund it properly.