Yield is a measure of the percentage of income return you get from an asset ( property, term deposit, bond, shares).
Property investors uses this quick calculation to determine if a property is cashflow positive, neutral or negative geared.
Yield is calculated by dividing the gross annual rental income by the purchase price.
[ Rent per year ] / purchase price x 100 = %
For example: Unit in Mount Druitt NSW sells for $200,000 and rents for $280 per week.
[ (280 * 52) / 200,000 ] x 100 = 7.28%
Note: 7.28% is the NET rental yield, meaning it doe not take in consideration the interest rate, tax benefits, depreciation or any another associated cost to hold the property
This quick calculations tells us the potential lost or gain we may experience to hold the property. Generally speaking if the rental yield is 2% higher then the current bank interest rate then the property is considered positive geared at that point in time. As 1.5-2% of the yield should be enough to pay for any associated cost to hold the property; such as strata, insurance, management fee and rates.
As important as the rental yield may be, rental vacancy plays an very important part in the investing decision; as it potentially tells us the CHANCE that this rental yield can be achieved and time-frame. No point buying a property with good rental yield when the rental vacancy is extremely high and the property is vacant for a long period of time.
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