Start with gross yield
Gross rental yield is the annual rent as a percentage of the purchase price. It is a useful first filter when you are comparing listings, and you only need two figures.
$650 a week × 52 ÷ $600,000 × 100 = 5.63%
The catch is that gross yield assumes the rent arrives all year and ignores every bill. An apartment with high strata fees can look better than a house on gross yield, then fall behind once costs are included.
Subtract vacancy and operating costs
Net yield starts with the rent you expect to collect. Allow for gaps between tenants, then deduct council rates, insurance, management, repairs and the other costs of owning that property.
Two vacant weeks leave $32,500 rent. Less $10,000 running costs gives $22,500 ÷ $600,000 × 100 = 3.75%.
Example: $600,000 purchase, $650 weekly rent, two vacant weeks and $10,000 annual running costs. Gross yield is 5.63%; net yield is 3.75%.
Which expenses belong here?
Include regular ownership and letting costs. Check whether the management quote includes GST and whether letting fees are additional. Use the owner’s share of water charges. Enter land tax from an estimate appropriate to your holdings and structure.
Loan repayments and income tax sit outside net rental yield. So do purchase costs in the standard formula. Advanced also shows net yield on total purchase cost, which includes duty, legal fees and other entered buying costs in the denominator.
Use yield as a filter, then check cash flow
A higher yield does not automatically make a better investment. A cheap property can have expensive repairs, weak tenant demand or limited resale options. Compare properties using the same cost categories and realistic rent estimates.
Once a property survives that first check, add its financing. The next question is how much cash you need to contribute each month. Our cash-flow guide shows the difference.
Further reading: ASIC Moneysmart: property investment.