How to determine the yield on your investment property
04 November 2022
If you’re thinking about buying an investment property, it’s important to know what the ‘yield’ or ‘return’ on your investment might be. There are different ways to calculate these figures, but first, let’s look at what ‘return’ and ‘yield’ mean.
What’s the difference between ‘return’ and ‘yield’?
‘Yield’ is typically seen as the income an investment produces over time and is expressed as a percentage. In contrast, ‘return’ is the amount that is gained or lost in a single period, and is generally expressed as a dollar value. A dollar return expressed as a percentage is not to be confused with return on investment (ROI), which measures net cash return over the entire life of an investment.
You could say that a yield is forward looking, since it gives you an idea of what an investment’s return might be going forward. A return might be considered backward looking, since it looks back at the dollar value of investment income or losses over time.
Both figures could help measure an investment’s financial value over a set period of time. Just make sure you consistently use one or the other so you’re comparing apples with apples.
Calculating the return on your investment property
Working out a basic yield
There are a few different ways to calculate yield. The most common way is to take the annual rental income and subtract annual expenses. Typical investment property expenses could include:
- loan interest costs and fees
- leasing agent fees
- insurance premiums
- council rates
- land tax
- maintenance costs.
Subtracting these costs will give you a ‘net rental income’ figure. You can then divide this number by the total value of the property. This will give you a basic yield figure.
For example, if your net rental income is $30,000 and the total cost of the property is $600,000, then the rental yield on a property is said to be 5%. Keep in mind a simple calculation like this may exclude renovation costs and one-off costs like stamp duty or legal fees.
Get a more accurate read using cash-on-cash return
Cash-on-cash return is often seen as a more accurate way to measure the performance of an investment property. It’s a measure of the cash flow an investor receives and can be expressed as a percentage of the original cash investment, including any major capital spend, such as renovation costs.
The calculation considers both the income generated by the property and the initial cash investment, giving a more robust picture of a property’s return. The cash-on-cash formula is defined as cash flow before tax divided by the total cash invested for a defined period.
What if your return is negative and how does negative gearing fit in?
A property investor is said to be 'gearing' their investment negatively when a property’s rental income doesn’t cover the cost of the investment loan repayments. Negative gearing could be used as an investment strategy, however like all investment strategies, it should only be considered after seeking advice from a tax professional or financial adviser with expertise in this area.
Chat with a home loan expert
A lending specialist from Suncorp Bank can help you understand your investment home loan options. Whether you’re a seasoned investor or just starting out, one of our lending specialists can help guide you through the process of getting finance for your next purchase.
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