When you invest in property in Australia, one of the first questions is: what’s the rental yield? It sounds fancy, but it’s basically your annual rent as a percentage of the property’s value – essentially how much bang for your buck you’re getting from rent each year.
We’ll break down how to calculate rental yield – it’s straightforward maths – using real examples from cities like Sydney and Melbourne. The formula works the same for a house in Sydney or a commercial space in regional NSW, though as you’ll see, typical yields can differ a lot.
What is Rental Yield?
Rental yield is essentially the annual return on investment from rent, expressed as a percentage of the property’s value. It’s essentially “how much of my property’s price do I earn back in rent each year?” If you get $5,000 a year on a $100,000 property, that’s a 5% yield. Simple.
There are actually two types of yield that you need to get your head around: gross yield and net yield. Gross yield is the easy one – just rent versus property value. Net yield digs a bit deeper and accounts for expenses. Before we get ahead of ourselves, let’s go step by step, starting with the gross.
Gross vs Net Rental Yield (and How to Calculate Them)
Calculating gross rental yield is straightforward. You take the rental income for the year and divide it by the property’s value, then multiply by 100 to get a percentage. In formula terms, it looks like:
Gross Yield = (Annual Rental Income / Property Value) x 100
For example, if you were to buy a unit somewhere in Melbourne for $600,000 and you rent it out for $450 per week, the maths would be: $450/week comes to $23,400 per year. Then ($23,400/$600,000) x 100 = 3.9%. That’s what the gross yield would be on that property.
So, that Melbourne unit has a gross rental yield of about 3.9%. Gross yield gives you a quick snapshot of return, but it doesn’t really tell the whole story because it ignores costs. That’s why net rental yield is so important. So how does that one work?
Net rental yield factors in the costs of owning the property – so that’s expenses like the following:
- Council rates
- Insurance
- Maintenance
Property management fees
Those are all the less-than-ideal bills you have to pay as a landlord. The formula is similar to gross, but you subtract the annual expenses from the annual rent first:
Net Yield = ((Annual Rental Income – Annual Expenses) / Property Value) x 100
Using our Melbourne unit example from before, let’s say your yearly expenses are about $5,000 (which would be enough to cover things like strata fees, minor repairs, insurance, etc.). The maths would go like this: after expenses, your annual rent is $23,400 – $5,000 = $18,400. Divide $18,400 by $600,000 and multiply by 100, and you get roughly 3.1% as the net yield.
So the net yield is around 3.1%. That’s lower than the 3.9% gross because we took out the costs. This is the yield that really matters for your cash flow, because it’s your true profit from renting out the place.
If you own a property that’s easy to maintain (say a new apartment with no garden or old plumbing to worry about), your expenses stay low and your net yield stays close to the gross. But an older house in Sydney with leaky pipes or a big yard can rack up bigger bills and push the net yield down.
Both gross and net yields have their uses. Investors often look at gross yield first (it’s quick and headline-grabbing), but net yield is what you actually pocket. Keep an eye on both when you’re sizing up an investment.
Residential vs Commercial Rental Yields
So, does rental yield work differently for residential versus commercial properties? The calculation method is the same, but the numbers and considerations can differ a bit.
In Australia, residential properties (like houses and apartments) often have lower yields but generally carry less risk. Commercial properties (like shops, offices, or warehouses) usually offer higher yields to entice investors, since they can come with higher risks or longer vacancy periods.
It’s common to see residential investment yields around 3-5% per year, while commercial property yields might range from 5% up to 8% or more. The higher yield on commercial places helps compensate for things like longer lease-up tims and generally higher volatility.
Another big difference is who pays the bills. In a residential rental, you (the landlord) cover most expenses. But with a commercial lease, the tenant often covers many outgoings (council rates, routine maintenance, etc.), which makes your life a lot easier. A good commercial tenant might even handle minor repairs themselves. Meanwhile, if you’ve got a residential tenant and the hot water system dies on a Sunday, guess who’s getting the call and the bill?
And don’t forget vacancies. A house might be empty only a couple of weeks between tenants, but a commercial property can sit vacant for months. That juicy 8% yield means nothing if the place is empty for that long.
What’s a Good Rental Yield in Australia?
Now the big question: what is a “good” rental yield? It’s a bit of a varied answer depending on where and what you’re buying. In general, a higher yield means more cash flow, but it might come with compromises.
For example, properties in cheaper or regional areas tend to have higher yields. Darwin often tops the charts for rental yield – around 6% for houses – nearly double the yield in Sydney (which is a bit closer to 3%). Sydney’s property prices are obviously pretty high, so even a decent rent becomes a small percentage. Darwin has lower property prices and solid rents, hence the higher yield.
If you’re interested in this from an investment point of view, you also need to weigh yield against potential capital growth. A high yield might mean the property’s value doesn’t grow as quickly (maybe it’s in a town that’s not as popular as one like Sydney).
Conversely, while a property with a low yield won’t give you much cash flow now, it might be in a promising suburb that’s looking like it is going to go up in price soon, so you’re banking on a bigger payday later.
So a “good” yield ends up being pretty relative. For residential properties, around 4-5% is pretty solid (since many houses are lower). For commercial properties, 6-8% is a good range.
If someone tells you that a given property will have a ridiculously high yield, check the fine print. Is it after expenses? Is the rent realistic and steady? Often, ultra-high yield comes from one-industry towns – if that industry shuts down, there goes your tenant.
At the end of the day, calculating rental yield is simple – interpreting it properly is where it gets a bit harder.
How Upscore Can Help
If you’re gearing up to invest – whether here or overseas – you’ll want your finances in top shape. Upscore’s Finance Passport can help by giving you access to multiple lenders and letting you compare offers – all for free.
