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• The Property Host Team

# How to calculate Yield

Updated: Apr 8, 2019

Property Investment isn't exactly rocket science but there are some basic concepts you should understand before committing to purchase any property. One of them, is yield and the other is Capital Gains but for now we will look at yield. Yield is an easy one to calculate because its an accurate and for the most part more predictable outcome.

I always like to err on the side of caution and calculate what I believe is the most likely amount (which is always the lesser amount) that way you can budget accordingly. The most important thing as a property investor is to MAKE SURE YOU CAN AFFORD IT. Too many people rush into buying, just because the BANK say's that they can. The buyer should do their own homework and truly understand the potential financial implications (as well as benefits!)

A yield basically put, is the rate of return on investment for the year and it is expressed as a percentage of the purchase price paid for the property.

The formula for calculating yield is really simple and anyone can do it, if you struggle with math you can even use an online yield calculator which will factor in your personal expenditure.

Lets look at two examples of calculating yield (in both of these examples we will be calculating net yield, because all properties have relevant expenses and this will be more accurate)

Example 1. 4 bedroom, 2 bathroom freestanding house in Caloundra

This property has been leased to long term tenants who will stay for 12 months or more.

Purchase Price - \$700,000

Weekly Rent - \$600

Expenses per year \$5000 (insurance, maintenance, rates etc)

\$600 x 52 = \$31,200 (annual rental income)

-\$5000 (annual expenses)

÷\$700,000 (property price)

x100

Yield = 3.74%

Example 2. 2 bedroom, 2 bathroom apartment in Noosaville

This property is going to be leased on Airbnb so theres a few more factors to consider and as such there are two possible outcomes provided.

Purchase price - \$700,000

Weekly rent - \$1300 (we estimate that this property will be occupied for 80-95% of the year so we have done two possible outcomes)

The \$1300 is also our base rate, the actual rate will likely be more because this property will achieve a higher rate in peak times.

Expenses per year (\$12,000 - \$14,000 - insurance, maintenance, body corp, management fees)

A. \$1300 x 34.4 = \$44,720 (annual projected income @ 80% occupancy)

B. \$1300 x 41 = \$53,300 (annual projected income @ 95% occupancy)

A. \$44,720 (annual income)

-\$12,000 (annual expenses) ÷\$700,000 (property price)

x100

Yield = 4.67%

B. \$53,300 (annual income)

-\$14,000 (annual expenses) ÷\$700,000 (property price)

x100

Yield = 5.6%

A good property manager should achieve the 4.6%, a hardworking and financially strategic property manager should achieve 5.6%. To find out how the Property Hosts, can achieve higher annual returns and more money in your pocket, call us today.