The concept of rental yield is an important yardstick most people use while investing in real estate. In simple words, it helps give an investor an idea of the profitability of the property to be rented out relative to its purchase price.
A prospective buyer looking to purchase a house in the Australian property market needs to understand properly what actually constitutes a good rental yield in order to make proper decisions.
What is Rental Yield?
Rental yield is an amount expressed in percentage form that portrays income generated through a property in proportion to its value. It will simply reflect potential return on an investment one gets through a rental property.
Different Types of Yields
The two kinds of rental yields are as follows:
- Gross Rental Yield: This generally means the total rental income you receive in one year divided by the price bought and then further multiplied by 100 to gain it in percentages.
- Gross Rental Yield= (Annual Rent/Property Value) ×100
- Net Rental Yield: This is, however, more effective because it subtracts all expenditure in the form of property management fees, maintenance, and insurance, thereby giving a pretty clear picture of the actual returns.
- Net Rental Yield = [(Annual Rental Income – Annual Expenses) / Property Purchase Price] × 100
How Much is a Good Rental Yield in Australia?
What amounts to a “good” rental yield in Australia may depend on a number of factors including, but not limited to:
- Location
- Type of Property
- Current Market Conditions
However, in general, a rental yield of 4% to 5% is considered decent in Australia, though this figure may change.
Location, Location, Location
Rental yields vary significantly depending on the different regions:
- Capital Cities: Properties located in major metropolitan cities such as Sydney, Melbourne, and Brisbane sometimes have lower yields, around 2% to 4%. These locations have higher property values that deflate yields. However, such locations offer the possibility of long-term capital gain.
- Regional Areas: On the other hand, regional properties normally bring in much higher returns, within the range of 4% to 6%, and sometimes even higher. Of course, this can be explained by lower buying prices against rental income.
Type of Property and Demand
- Apartments vs. Houses: Generally, apartments yield a higher percentage than houses. This is because the purchase price of an apartment is generally lower, yet it can realise a competitive rent.
- Demand and Vacancy Rates: Areas with high rental demand and low vacancy rates tend to have better yields. For instance, cities with a strong job market or proximity to universities often have higher rental demand.
Factors Influencing Rental Yield
Several factors impact rental yield in Australia:
1. Property Purchase Price
The initial cost of the property plays a significant role. Lower purchase prices can lead to higher yields if rental income is stable or increasing.
2. Rental Income
Rental income depends on:
- Market Conditions
- Property Location
- Quality
High demand areas with limited supply often command higher rents, boosting yields.
3. Expenses
The following operational costs also need to be considered:
- Maintenance
- Property Management
- Insurance
- Rates
High expenses can erode rental yield, even if rental income is strong.
4. Market Conditions
Economic factors, interest rates, and housing policies can influence rental yields. For example, low interest rates can make borrowing cheaper, encouraging investment but potentially increasing property prices and reducing yields.
5. Local Amenities and Infrastructure
Properties that are in close proximity to the following amenities tend to attract a large pool of tenants:
- Schools
- Public Transport
- Shopping Centres
- Recreational Facilities
The convenience can be used as a justification for charging higher rent and hence providing for higher yields.
6. Economic Stability and Job Availability
The area with economic stability and increased job availability tends to have a better rental market. Areas with substantial industries, universities or government offices tend to have continued demand for rental properties.
How to Increase the Rental Yield
There are several ways to enhance rental yield:
1. Renovation and Upgrading
Improving the condition of a property can justify higher rent. Minor upgrades, such as the following, go a long way in making the house appealing to tenants:
- Modern Appliances
- New Paint
- Better Landscaping
Furthermore, upgrading to energy-efficient facilities, including solar panels or increasing insulation, makes the house marketable to environmentally conscious tenants and minimises utility bills.
2. Efficient Property Management
Efficient management will minimise vacancy rates and maintenance cutbacks. A good property manager can also ensure that the rents are kept at par with the current market trends. They can screen tenants, prepare lease agreements, and conduct regular inspections of the property to keep it valuable and attractive.
3. Review Rent Regularly
Keep rental rates competitive by reviewing them regularly to maximise income. Understand the local market to make the necessary rent adjustments. Market studies and benchmarking against similar properties will clearly show what works for rental prices.
4. Consider Short-Term Rentals
Converting the property into a short-term rental, such as on Airbnb, could significantly increase yields in the right locations. This, however, is a much more managed approach and often comes with even higher costs.
When considering short-term rentals, take into account the controlling regulations in your area and potential seasonality in demand.
5. Enhance Property Appeal
Improving the curb appeal of the property will attract more tenants and allow the property owner to ask for higher rent. Performing the following minor actions can significantly enhance appearance:
- Gardening
- Repainting the Exterior
- Replacing Fixtures
First impressions are important, and a well-kept property will surely rise above the competition.
6. Additional Amenities
Additional features such as high-speed internet, secured parking, or shared space can be provided to make a house more attractive. These extras will give an edge over other properties in the same location and hence can demand higher rent.
Risks and Considerations
While aiming high is good regarding rental yields, there are other factors to balance with the goal:
1. Capital Growth
High rental yields usually provide a trade-off in lower capital growth. The investor will have to decide whether to have steady income or a greater increase in the value of the property in the long run. A balanced approach can thus be offered to both yield and growth for a more stable investment strategy.
2. Market Volatility
The rental market may fluctuate depending on various parameters such as:
- Economic Conditions
- Interest Rates
- Regional Factors
It pays to research well and prepare for potential downturns. Diversification into different regions or classes of property will also reduce some of this risk.
3. Changes to Laws and Regulations
Any change in the law with regards to property, such as those concerning tenancies or taxation policies, may affect yields.
For instance, being updated on changes in legislation or legal requirement changes is important. This could include changes in the negative gearing law or stamp duty legislation that will impact the return.
Conclusion
A good rental yield in Australia is considered to be between 4% to 5%, though it depends on:
- The Location
- Type of Property
- Current Market Conditions
Investors consider both rental yield and capital growth prospects; hence, a balance must be struck between immediate income and the long-term appreciation of the assets.
Understanding influences on rental yield and how an investor can improve or manipulate them to their benefit enables more solid decision-making in maximising return in the Australian property market.
Finally, it is thorough research, proper management of the property, and continuous update of information on market trends that lead to full success of the rental property investment.
