Rental yield calculator

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What is a rental yield?

Rental yield is the amount of money your investment property generates. But what many first-time investors don’t realise is that there are multiple types of rental yield.

For instance, you have the gross yield. This is the most common calculation discussed in property investor circles.

You take the annual rental income and divide it by the property’s current market value.

More important is the net rental yield. This takes into account not the operating costs of a property. These are things like rates, insurance and maintenance. But operating costs don't include your mortgage or any tax. 

You can do the math, or you can use a yield calculator.

A good rental yield depends on the type of property and location you’re investing in.

For instance, if investing in a growth-focused property, like a townhouse in Auckland, target a gross rental yield between 4 - 4.6%.

However, if investing in a yield-focussed dual key apartment or a room-by-room rental in Hamilton, that should attract a rental yield in the 5.5 to 6.3% range.

How do I interpret the calculator's results?

After you put your information into the calculator, you’ll see a gross and a net yield. 

Let’s go through the differences.

Gross yield

To calculate your gross yield, take the rent you expect your property to make each week. Multiply that by 52 weeks to get the potential annual rent. Then, divide that by the current value of your property.

Gross yields are easy to calculate. That's why you'll often see them mentioned and reported in the media. But, for an individual property investor, a gross yield is not very useful.

Why? Because a property might attract a high rent, but it might have really high costs. That means your property might lose a lot of money.

For example, if you invested in a run-down property, you might be able to buy it cheap and charge a good rent. So, this property will likely have a high gross yield.

But, if the hot water cylinder bursts, it could cost you a lot in the end.

Net yield

With the above considered, it makes sense to pay attention to the net yield of an individual property.

This shows your return after your operating expenses but before your mortgage expenses.

Operating expenses include rates, insurance, property management and maintenance. But it excludes the financing costs of your mortgage.

The net yield is more useful when comparing properties. That's because your finance costs are often similar between properties. But your operating expenses can vary widely.

For example, if you just look at rent, an apartment might seem like a good investment. Then you include the body corporate, and it might not seem so great.

When making calculations, should I use purchase price or current value?

To work out the rental yield, you need to use the current value of the property.

Some people in property investment circles argue that you should use the price you paid.

But, here at Opes, we recommend using the current market value of a property.

The reason for this is that house prices change. It doesn’t matter what the property was worth 10 years ago. You want to know the yield of the money you’ve got invested today.

For instance, if you bought an apartment for $275,000 in 2013 and rented it for $300 a week, it would attract a gross yield of 5.67%.

Let’s now say that over the last 10 years the property has doubled in value and is now worth $550k. Now let’s say that over that period the rent stayed the same.

If you calculate gross yield based on the original purchase price, the yield would still be 5.67%.

But calculate the yield based on current value and the property attracts a yield of 2.84%.

That’s below our acceptable yield range for an apartment (4.5% - 5.5%). This would raise alarm bells for savvy investors. They would increase the rent because the property is under-rented.

But if you had used the original purchase price as your guide, you could have missed this.

What other calculators can I use?

Thinking about buying an investment property? You'll want to run a whole heap of different numbers.

That's why Opes has created a range of different property investment calculators. You can use it to check whether it makes sense for you to invest.