The yield from rental property is basically the rate of return from your investment, before tax.  You can use it to compare different properties and locations. To work out the gross rental yield, you can divide the annual income from the property by the purchase price and multiple by 100 to get the percentage rate of return.

To work out the net rental yield you divide the net income from the property – i.e. rent minus expenses (excluding finance costs) by the purchase price, and multiply by 100 to get the percentage rate of return.  Alternatively, you can use our calculator. 

Example:
A property with a purchase price of $400,000 and estimated weekly rental of $500.

• Annual rental income of $26,000 ($500 x 52 weeks)
• Subtract annual expenses of $5,000 = net income of $21,000
• Divide net income by purchase price of $21,000 divided by $400,000 = 0.053
• Multiply by 100 = 5.3%.

5.3% before tax may not seem all that attractive compared with some other types of investments.  However, that isn’t the total picture.  Your overall return is influenced by other factors including:

• Any increase in the property’s value, which will give you a capital gain when you sell it in the future
• Any tax relief you may be eligible for.

Having worked out the rental yield for a particular property, you can compare it against the potential rental yields from other investment properties to help you decide which offers the best opportunity for you.

What should you include as expenses?
Expenses for your rental yield calculation should include insurance, rates, maintenance and other expenses your property may incur, such as body corporate fees.  You should also allow for some vacant periods between tenants.

If you’re in doubt, estimate 25% of the rental income for expenses. On a National Bank Home Loan application for a rental property, you can use up to 75% of the rental income to service the loan; this allows 25% for expenses such as those mentioned above.

This material is for information purposes only. You should seek professional advice related to your individual circumstances. While The National Bank has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. To the extent permitted by law, The National Bank does not accept any responsibility or liability arising from your use of this information. Our lending criteria, terms, conditions and fees apply.