Rental Yields – And How They Make You Wealthy
Everyone understands capital growth. It’s simple enough.
But rental yields?
They’re a bit trickier to get your head around.
And you need to know what they are and how they work because they’re an important piece of the puzzle.
The good news is it’s easy to master rental yields.
Rental yield is simply the annual rental income as a percentage of the property’s value.
The most common type is gross rental yield.
This is the annual rental income divided by the property value.
Let’s run an example and see how simple it is.
Suppose your investment property is worth $600,000 and it rents for $500 a week.
There are 52 weeks in a year, so the total annual rental income is $500 x 52, which is $26,000.
You make $26,000 income on a $600,000 investment.
And the yield is $26,000 divided by $600,000, which is 4.33%.
Simple enough.
Of course, the higher the yield, the better your cash flow is.
But should you always target the highest possible yield?
Typically, properties with a higher rental yield have lower capital growth. Not always, but that’s generally how it works.
And you need a pretty decent rental yield because you have to pay interest on your loan, plus insurance, rates, maintenance, and other expenses.
Having said this, you can also get some pretty decent tax deductions too, which help.
Low rental yields mean you’re chipping in more money each month to hold your investment property, while higher yields mean you’re putting in less.
You might even be in front.
What Yields Should You Be Looking For?
There’s no magic number for the ‘ideal’ rental yield.
If you’re on a higher income, you can invest in properties with a lower yield because you can easily make up the shortfall, allowing you to target higher capital growth properties as a result.
If you’re on a lower income, though, you should target higher-yielding properties.
This way, you can afford to keep your investment property because you’re not out of pocket much, if at all.
Remember, too, that most banks only take around 80% of your rental income into account when assessing your borrowing capacity.
And if you own too many low-yielding properties, the banks will eventually stop you from getting more.
(We can help you with this, by the way. If you book an appointment with us, we’ll show you how to get the right combination of yield and growth so you can keep investing).
Don’t Make This Common High-Yield Mistake
As a word of warning, you’ll see plenty of spruikers pushing super high-yield properties.
The promise of high cash flow is enticing, but the reality is that most of the time, high cash flow properties are very risky.
And the capital growth is low.
Capital growth is the name of the game, and the rents are there to support you and keep your portfolio growing.
Later on, you can switch to cash flow investing to replace your income, but in the beginning, you’ll want to avoid this trap.
What Drives Rental Yields?
By now, you know what rental yields are.
You know how they’re calculated.
You know their place in your investing strategy.
And you know not to chase high yields at the expense of capital growth when you’re starting out.
The next question is … what drives rental yields?
One factor is the type of property.
Flats and apartments typically enjoy higher yields because they’re attractive as a low-maintenance option for renters, and the cost to purchase them is lower.
The yield on houses is typically lower than that on apartments and flats; however, capital growth is higher because of the greater land content.
Commercial properties can attract higher yields as well.
Another factor affecting yields is how popular the area is with renters.
More renters mean higher demand, which translates to higher rents.
How to Maximize Rents
Of course, the question all investors have is … “how do you maximize rents?”
To a large extent, rents are set by market forces.
You can’t charge $600 a week when comparable properties are only renting for $500 a week.
But you can certainly make sure you’re getting the highest rent possible.
It’s all about being vigilant and staying on top of your game.
For a start, you should be on top of what the market’s doing. Keep a regular eye on how much similar properties are being listed for.
It’s also a good idea to know what’s happening in the local area, too, because new employment opportunities, like major construction projects, will increase demand and rents.
Also, make sure your property is well-maintained and attractive to renters, especially when it’s time for a new tenant.
It’s often a good idea to make sure your lease agreement allows you to increase rents regularly.
At the moment, the market is moving rapidly, and you should have the flexibility to adjust rents as needed.
And the best way to ensure your rents are maximized is to work with professionals who know your area and can help you get the highest possible rent with a lease agreement that works for you.
So there you have it.
Rental yields are a vital part of the investing puzzle.
And it’s a fine balance between:
- Being able to hold onto your investment properties without spending too much (if any) money each month on the shortfall
- Targeting properties that give you maximum capital growth at the right yield
- Ensuring the banks continue to lend you money and don’t stop you because your yields are too low
- Targeting properties with potential for significant rent rises in the future, so your cash flow position continues to improve, along with your borrowing capacity
How Do You Find the Perfect Balance?
It’s one thing to know what yields are and how they work.
And another thing entirely to maximize this knowledge to acquire the highest growth properties you can afford … and get your next house as soon as you can.
We can help you.
We can set up a call with you to take you through it and show you how to build a property portfolio that costs you very little money to own.
And that sets you on the path to financial freedom sooner.
This call is cost- and obligation-free, and you can book one by filling out the form below.