Whether you're a first-time property investor or a long-term one, rental yields are can ensure a property financially works for you.

But what exactly are rental yields and why are they so important?

Let's take a look.

Rental yields: what are they?

Put simply, a rental yield is the financial return a property investor will pocket in the short and long-term.

Or, in other words, rental yields "measure the return on investment (ROI) generated by a property".

Rental yields: why are they important?

Whichever way you calculate it, rental yields indicate whether a property investment will give its investor maximum long-term profitability and performance.

Yields are also a great way of assessing a property investment's risk.

Rental yields: how to calculate

Rental yields are featured as a gross or net percentage of an investment property's purchase price or market value.

Gross and net yields are calculated differently with the former calculation being basic while the latter is a more accurate one.

Gross yield calculation:

Annual rental income ÷ investment property purchase price (or market value) x 100

Net yield includes council rates, property management, insurance, body corp fees, depreciation and property maintenance issues, all of which can add up fast.

In other words, it is the income a property investor will pocket after all their investment expenses are paid.

Net yield calculation:

Annual rental income - property costs ÷ investment property purchase price (or market value) x 100

Rental yields: what is a good figure?

Unfortunately, there is no easy, simple answer to this much-asked question.

Adding to the challenge is that a high yield - while initially sounding terrific, giving investors great returns - can mean much higher rental risks while a low yield may mean a property is overvalued.

The opposite is true for high yields.

However, the consensus among lenders and the financial industry is that suburban areas, particularly state capitals, will typically offer gross rental yields of 3-5%.

In regional areas, expect gross yields of 10% or above.

CoreLogic's monthly Hedonic Home Value Index report in April 2024 notes Darwin now has the highest gross yield for overall dwellings in the nation (6.5%).

Sydney has the lowest gross yield of 3.1% with the remaining capital cities having gross yields of 3.57% (Melbourne) and 4.6% (Perth).

Melbourne's latest figure is its highest since March 2015 and follows a 2.76% yield in March 2022.

CoreLogic attributes this significant increase to a -4.1% fall in Melbourne dwelling values over the past two years along with rents also surging 21.1% higher.

Rental yields: things to consider

Low-yield properties also come with benefits and disadvantages with concepts such as negative gearing often coming into play.

Negative gearing - when a property's expenses outweigh the owner's investment income - often holds a major position in such tax implications.

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