What is gross rental yield, what is a good rental yield, and how can you ensure you do get a good return on your property investment? What’s the difference between gross rental yield and net rental yield? Good questions, and we’ve come up with some great ways to boost your chances of getting a good rental yield on your investment property.
1. Know Your Maths, Mind Your Property Investment P’s & Q’s, and Invest Wisely
Successful property investors know their property value and all the right terminology like gross rental yield, net rental yield, capital growth, negative gearing etc. They also know how they relate to a successful investment property portfolio. Plus they keep on top of all the metrics that go into ensuring a good rental return on their investment. Here’s a quick refresher about things like calculating net rental yield if you don’t know, or have always relied on a friendly property manager to do it for you!
Calculating Gross Rental Yield Vs Calculating Net Rental Yield
Simply, gross rental yield is the percentage of the property’s value that is generated in annual rental income. It doesn’t factor in any of the expenses associated with the property – rates, insurance, strata fees, maintenance, insurance, loan or mortgage repayments, and so on.
To calculate gross rental yield:
- Calculate your annual rental income by multiplying the weekly rent you receive by 52.
- Divide this figure by the property’s purchase cost.
- Multiply that figure by 100 to calculate the percentage.
What is Net Rental Yield?
Net rental yield factors in the ongoing expenses and overall costs involved in owning and maintaining your property. It is also a more realistic way to calculate rental yield because it gives you a better idea of the viability of investing in a particular property. Indeed, aiming for high net rental yield vs just the highest gross rental yield is always a better way to maximise your ongoing return from your investment property.
To calculate net rental yield:
- Calculate the annual rental income for the property using the same formula as for calculating gross rental yield.
- Calculate your annual property expenses.
- Subtract the expenses from the rental income.
- Divide that figure by the purchase price of the property.
- Multiply that figure by 100, which gives you your % net rental yield for the property.
Know What a Good Net and Gross Rental Yield for Your Area Is
Gross rental yields vary depending on where you buy, and property type. Each capital city is different, and metropolitan and regional rental yields are also different. Units are different again from houses. As a broad overview:
- Properties in capital cities and major metropolitan areas are trending between 3 – 5% rental yield (Darwin has the highest rental yield of all the capital cities).
- In regional areas you’ll get higher rental yields again for houses (5% + is considered a good gross yield). West Kambalda in regional Western Australia for example currently has one of the highest regional rental yields.
- Units typically also have a higher rental yield than houses.
So, as a general rule, if your rental property generates a rental yield between 3 – 5% or above, you can consider it a good return!
Another good investment strategy is to invest in a property that will not only generate a high rental yield but will also increase in market value. This will provide you with regular cash flow and capital growth potential.
Getting The Best Rental Yield For Your Property
Other factors that can affect your annual rental income and thus rental yield include the condition and age of the property. An older investment property will often have a lower rental yield because it costs more to maintain. A new property on the other hand should have a higher rental yield because there is less maintenance.
2. Location Matters When it Comes to Maximising Annual Rental Income
Rental properties located in good neighbourhoods with low crime rates and close to:
- good schools,
- good amenities,
- public transport,
- employment centres, and
- shopping centres
have lower vacancy rates.
Tenants, particularly those with families, are looking for safe, family friendly rentals and if you can supply that, you could have the perfect investment property! Certainly, you’ll have one that can be relied upon to generate a higher cash flow, and good annual income, for you.
3. Research Where The High Rental Yields Are
If you’re still in the homework phase of your property investment journey, get your hands on a free property report. It will tell you where you’re most likely to find the most affordable properties with the best rental returns and lowest vacancy rates. This will help you calculate rental yield and work out your best options with respect to your financial situation.
4. Keep Your Eyes On The Market
Rental market trends that is… This will ensure you set a competitive rent that not only produces a good rental yield but also keeps tenants in your property.
5. Keep The Property Well Maintained To Ensure a High Rental Yield
Keeping on top of maintenance ensures your property remains:
- Safe,
- Attractive to tenants,
- Able to earn the best possible rent for you.
Prompt repairs also reduce the risk of expensive repairs later. Remember, these expenses are offset against rental income so the more they cost, the lower your net rental yield will be.
6. Regularly Audit Your Property Associated Expenses
Keep a close eye on all your outgoings – the more it costs you to maintain your property the more it eats into your rental yield. Identify areas where you can cut costs without reducing the level of service and maintenance you provide. For example…
7. Renegotiate Contracts With Service Providers
Regularly review any contracts you have with services like pest control, gardeners, mowing contractors, general maintenance, insurance, property managers, and tradies. Look for competitive rates to keep expenses under control whilst ensuring you still receive quality work.
AND…
8. Invest In Energy-Efficient Upgrades and Maintenance
Energy efficiency is hot news at the moment with the Federal and state governments offering a raft of incentives to encourage home and business owners to upgrade to more energy-efficient appliances. Investigate your options in this regard as there may be considerable savings on offer, even for investment properties. Consider:
- Replacing old light fixtures with new, energy efficient ones.
- Installing solar panels, or upgrading an existing system.
- More efficient heating options for hot water.
- Replacing old inefficient air conditioners, and other power guzzling appliances, with more energy efficient ones.
- Installing insulation.
- Fixing gaps around doors and windows.
Ultimately, an energy-efficient rental is not only attractive for tenants because it means a reduction in utility costs and energy use but is also contributing to a cleaner, greener environment.
9. Invest in Street Appeal To Ensure a Better Rental Return
If you know anything about real estate, you’ll know curb appeal counts. It’s the first thing potential tenants see when they approach your property. The more attractive it is, the greater the odds of a positive first impression.
You can make your investment property pop and stand out from other rentals with easily doable things like a:
- Fresh coat of paint,
- Clean, well-presented façade and exterior,
- Good landscaping,
- Well maintained yard.
Spend some time weeding the gardens and mowing the lawns, or hire a contractor to do it for you. Remove and replace dead and dying plants. Fertilise the lawn. Consider reticulation to save your tenants having to hand water. While they may be upfront costs, the payoff is attracting good tenants and being able to potentially ask a higher rent, which gives you a higher rental yield. It all counts.
10. Furnish The Property to Appeal to a Higher Rental Market
Furnished rentals are a good way to target a different tenant market, like corporate and short-term tenants who are looking for convenience and are prepared to pay for it. Consider including items like:
- Good quality appliances – stove, refrigerator etc,
- Essential furniture and furnishings,
- Kitchenware
11. Provide Quality Amenities
Having all the conveniences in-house or on-property, particularly if you have a unit, can justify charging more rent, and increase your rental yield. This includes a:
- Laundry space with washing machine and dryer,
- Dishwasher,
- Microwave,
- Air conditioning,
- Heating,
- Additional storage
If you own a unit complex or apartment building, you could also consider including tenant amenities like a private swimming pool, gym, spa, barbecue area, and so on.
12. Install a Swimming Pool
If you own a house without a pool, installing one may increase your pool of potential tenants, particularly in a climate like Brisbane’s! It will also justify charging more rent, and thus earn more money for you.
13. Screen New Tenants Carefully
Reduce the risk of unreliable tenants by performing credit and background checks. Contact employers and former landlords to help establish their reliability and rental history. Defaulting tenants again reduces your rental income, and rental yield.
14. Consider Offering Long-Term Leases
Long-term leases reduce tenant turnover and vacancy costs with a corresponding impact on your bottom line. Consider offering twelve to 24 month leases, and offer incentives to tenants who will sign longer leases.
15. Offer Incentives To Tenants To Keep Your Property Occupied
A vacant investment property generates no income so keep it occupied. Consider offering competitive rental terms and rates to attract long-term tenants, and keep them. Even a low rental yield is better than no rental yield! Be the best landlord you can be to your existing tenants so they’re happy to renew their lease.
16. Make It Easy For Your Tenants To Pay You
Make it convenient for your tenants to pay you! Give them a range of online and offline payment options.
17. Regularly Review Rental Rates and Increases
Keep your rental rates aligned with the local area and property market to ensure you are maximising rental yield without exploiting your tenants. Always:
- Study the local market rates when working out when and how much to increase rent.
- Give your tenants ample notice before you make any changes to their rent.
- Ensure you are compliant with local rental laws and caps.
18. Adjust Rent Seasonally if Appropriate
If your property is in a tourist area, think about adjusting your rental rates to coincide with seasonal fluctuations in visitor numbers and peak travel times. Alternatively, consider offering off-season rates to attract long-term tenants and reduce your vacancy rates. Be sure to always comply with local legislation guidelines.
19. Make Your Marketing Effective
Invest time in your marketing:
- Use good quality photos that show off all the best features of your property.
- Provide detailed listings of all the amenities for rental websites.
- Utilise online advertising channels and social media to ensure you reach the biggest possible market.
If you don’t know how to market effectively, consider learning. It will be cheaper than hiring a marketing professional.
20. Consider Building a Brand
Make it one of your investment goals to build yourself a professional online brand that markets ‘you’ as a reliable, responsive landlord who provides exceptional service for your tenants. Alternatively, partner with a reliable, professional property management company who is all of those things, and more!
21. Optimise All Available Tax Deductions Each Financial Year
Consult a property tax specialist when it comes to maximising all available tax deductions. The more you can reduce these, the higher your net rental yield will be.
22. Insure Yourself and Your Property Against Unexpected Hits To Your Net Rental Yield
Large unexpected bills can make large unexpected dents in your rental yield so make sure you have adequate insurance cover (landlord, public liability). If you can recoup most of the expense via insurance, it will significantly increase your chances of maintaining what is considered a good rental yield.
23. Hire a Good Property Management Company To Do The Above For You
Sometimes life just doesn’t make time for us to do all the things we want to do as a property investor. Even if you only have one rental property, keeping on top of everything that will give you a good rental yield can be hard.
A professional property management company, like Position One Property, will handle all the routine ‘stuff’ for you – from helping calculate net rental yield to offering property investor support. We are also up to date with current property regulations and laws, meaning one less hassle for you to worry about. Contact us today.