Investment loans
Rental Yield Explained: How to Work Out the Return on an Investment Property
Rental yield explained for Australian investors: how to calculate gross and net rental yield, work out the return on a property, and where yield fits.
Rental yield is the annual rental income from an investment property shown as a percentage of the property value. It is one of the simplest ways to compare how hard your money is working across different properties, suburbs and price points. In this guide the team at Finance Lab walks through what rental yield means, how to calculate gross rental yield and net rental yield, and where yield fits alongside the other numbers that matter when you buy an investment property.
Yield is only ever one part of the picture. A property can carry a strong rental yield and still suit one investor and not another, because the right choice depends on your circumstances, your goals and the lender criteria that apply to you. Use yield as a comparison tool, not a verdict.
What rental yield actually measures
Rental yield connects two figures: the rent a property brings in over a year, and what the property is worth. Express the first as a percentage of the second and you have the yield.
Think of it as the income side of property investment. The other side is capital growth, which is the increase in the property value over time. As Moneysmart notes, if your property increases in value you may benefit from a capital gain when you sell. Yield and growth often pull in different directions, so most investors weigh both rather than chasing one in isolation.
You earn rental income only while the property is tenanted, so any yield figure assumes the property is let. Vacancy, even for a few weeks between tenants, lowers the income you actually receive.
For an investment loan, you can see how a purchase sits against the rent and costs on our investor home loans page.
Gross rental yield: the quick comparison number
Gross rental yield is the headline figure most listings and reports quote. It ignores running costs, which makes it fast to calculate and useful for a first pass.
The formula is:
Gross rental yield = (annual rent / property value) x 100
Worked example. A property is valued at 600,000 dollars and rents for 550 dollars a week.
- Annual rent: 550 x 52 = 28,600 dollars
- Gross yield: (28,600 / 600,000) x 100 = 4.77 per cent
Gross yield is handy for ranking a shortlist, but it overstates what lands in your pocket because it leaves out every cost of holding the property.
Net rental yield: the figure that reflects real costs
Net rental yield is the more honest number. It subtracts the ongoing costs of owning the property before dividing by the value, so it reflects the income left after the property pays its own way.
The formula is:
Net rental yield = ((annual rent - annual expenses) / property value) x 100
The expenses that belong here are the recurring costs of holding a rental. Moneysmart lists the ongoing costs of an investment property as council and water rates, building insurance, landlord insurance, body corporate fees, land tax, property management fees if you use an agent, and repairs and maintenance.
Worked example, continuing the one above. The 600,000 dollar property earns 28,600 dollars in annual rent and runs up 8,000 dollars in annual expenses.
- Net income: 28,600 - 8,000 = 20,600 dollars
- Net yield: (20,600 / 600,000) x 100 = 3.43 per cent
That is more than a full percentage point below the gross figure, which is why net rental yield is the number worth trusting when you compare properties properly.
Gross rental yield versus net rental yield
Both numbers have a job. The table below sets them side by side.
| Measure | What it includes | Best used for |
|---|---|---|
| Gross rental yield | Annual rent and property value only | A fast first comparison across a shortlist |
| Net rental yield | Annual rent, property value and ongoing costs | A realistic view of income after expenses |
A simple rule of thumb: use gross yield to narrow the field, then run net yield on the properties that make the cut.
How to calculate rental yield, step by step
- Find the annual rent. Take the weekly rent and multiply by 52.
- Confirm the property value. Use the purchase price, or a current valuation if you already own the property.
- For gross yield, divide annual rent by the value and multiply by 100.
- For net yield, total the annual ongoing costs first, subtract them from the annual rent, then divide by the value and multiply by 100.
- Compare like with like. Run the same method on every property so the numbers are directly comparable.
Where yield sits next to cash flow, gearing and tax
Yield is a percentage. Cash flow is the dollars that move in and out of your account each month, and the two are not the same thing once a loan is involved.
This is where gearing comes in. Moneysmart defines positive gearing as borrowing to invest where the income, for example rent, is more than the cost of the investment such as interest and other expenses. Negative gearing is the reverse: borrowing to invest where the investment income is less than the cost of the investment. A property can show a positive yield on paper and still be negatively geared once loan repayments are counted, because yield is measured against the property value while gearing is measured against your total holding costs.
Tax matters too. Moneysmart notes that investment income, including rent, is included in your tax return and taxed at your marginal tax rate, and that you can offset most property expenses against rental income, including interest on any loan used to buy the property. When you sell, the capital gains tax discount means that for assets held longer than 12 months only half the capital gain is generally taxable. How any of this applies to you depends on your circumstances, and tax questions are best put to a registered tax agent or accountant.
Yield measures income against the property value. Whether a property is positively or negatively geared depends on your total holding costs, including loan repayments, so the two figures can point in different directions.
Whether an investment property suits your plans depends on your goals, your borrowing position and the lender criteria that apply at the time. To see how a loan would sit against the rent and costs, you can model the repayments first and compare that against the rental income. Try the repayments calculator to put real numbers behind the yield.
Try the repayments calculator
Open the calculator to run your own numbers.
Who may find rental yield most useful
Yield is most useful when you are comparing options rather than judging a single property. It helps if you are weighing two suburbs, deciding between a unit and a house, or sense-checking whether an asking price is reasonable against the rent on offer. If you are buying for capital growth, a lower yield may be acceptable when the growth outlook is stronger, so weigh both. The right balance depends on your circumstances and what you want the property to do.
If you are new to property and still working through the basics of buying, our guides for first home buyers cover the groundwork. Start with how a deposit works and the costs that come with buying, then return to yield once you are comparing investment options.
Buying with 5 percent depositFrequently asked questions
Frequently asked questions
What is a good rental yield? There is no single number that counts as good, because it depends on the property type, the location, your strategy and how you balance income against capital growth. Higher yields often come with trade-offs, so look at net yield, cash flow and growth together rather than chasing the highest headline figure.
What is the difference between gross and net rental yield? Gross rental yield uses only the annual rent and the property value, which makes it a fast comparison. Net rental yield subtracts the ongoing costs of owning the property first, so it reflects the income left after expenses. Net yield is the more realistic figure.
Does rental yield include the home loan repayments? No. Yield is measured against the property value, not your loan. Loan repayments affect your cash flow and your gearing position, which is why a property can show a positive yield and still be negatively geared.
How often should I recalculate rental yield? It is worth recalculating when the rent changes, when the property is revalued, or when your ongoing costs shift, since each of those moves the figure. Reviewing yield against current rent helps keep your comparison accurate.
Is rental yield the only number that matters? No. Yield sits alongside cash flow, capital growth potential, gearing and tax. Looking at yield on its own can be misleading, so use it as one input among several.
Talk it through with the team at Finance Lab
Rental yield is a useful starting point, but the figure that matters most is how a property stacks up against your own borrowing position and goals. If you are weighing an investment purchase and want help reading the numbers, the team at Finance Lab can walk you through how the rent, the costs and a potential loan fit together for your circumstances. Get in touch to talk it through.
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