HOW IMPORTANT IS YIELD IN PROPERTY INVESTMENT?
Q: What does yield mean?
Yield is simply another name used for the rate of return or return on investment.
Rental yield is a term used to identify the annual income from the property investment, expressed as a percentage of the investment's total cost.
Q: How to work out yield?
The equation process to work out the yield is as follows:
Take the income generated (rent) from a property as an annual percentage of the property’s value. The gross rental yield is calculated by taking the weekly rental income and multiplying it by 52 weeks.
Then divide the annual rental income by the property’s value, which can be either the purchase price or market value then multiply by 100. If a property costs $500,000 and you are receiving $500 a week in rent, over a year, that $500 a week x 52 weeks = $26000 p.a which is 5.2% of $500000.
Q: What is a strong yield?
A rental yield of 5.2% is a strong yield, particularly if the property is in an area whereby a strong capital growth is likely. The higher the rental yield the easier it is to service financially.
All dwellings across Sydney and Melbourne are currently sitting around 3.5% yield vs Brisbane at around 5%.
Using the above example of a $500,000 property, Sydney and Melbourne would return $336 per week vs $500 a week in Brisbane. That's a significant difference.
The golden ticket of course is to be investing in a property that supplies you both a good rental return and a strong capital growth.
Historically, however, the higher the yield, the lower the growth.
As a few examples, the greater rental yields of 6 -8% come from commercial properties, student accommodation, serviced apartments, mining towns, or short lease properties such as Airbnb.
However besides not being favoured by the banks, they will therefore usually require a bigger deposit, invariably show little or no growth, and often be exposed to higher vacancies and longer periods to sell.
Q: What are the key takeaways on rental yield that every investor should know?
Rental yield is only one of the pieces of the puzzle but an especially important piece.
Having no rental income can make holding that investment exceedingly difficult indeed.
Therefore it's imperative to minimise the exposure to vacancy or rent falls by purchasing in areas whose macro fundamentals make sense in terms of the desirability to the owners and tenants choosing to live in that suburb.
A desirable suburb will have a low level of incoming stock, high population growth, employment across most economic sectors, significant infrastructure appealing to the emerging markets, the comfortable affordability ratio, and a high percentage of owner-occupiers (70%).
I am a big believer in the adage:
“Invest for yield one rarely finds growth, invest for growth, and yield will take care of itself."
Naturally what is best for each investor depends on many personal factors, and that strategy is firstly started with a good financial planner and/or accountant to work out what is best for your needs, wants and budgets.
Total yield or return on investment in a residential property is only derived when the property is sold.
All investors should calculate all initial purchase costs such as deposits, stamp duty, and legal fees as well as post-tax ongoing annual holding costs such as rates, interest charges, management fees, insurances, strata fees (if applicable). Finally sales commissions and capital gains tax need to be factored in.
Therefore, the total return on investment or yield, is the selling price, less all the costs mentioned above … that balance is your net yield or return on investment.
As is always the case, to ensure a better result, the correct due-diligence will greatly assist in de-risking the investment to maintain a decent rental yield, keep vacancies to a minimum and allow for a strong return in terms of capital growth.
Also remember, good research is critical for a good outcome!
To stay up-to-date make sure you join our Weekly Property Market Pulse Newsletter here.
Warren Jacobs - Senior Property Investment Consultant at Meridian Australia
P: (02) 9939 3249
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.