Rental properties are considered one of the best investment assets given their ability to provide a steady flow of passive income - one big factor, however, that can tell whether property investment is successful is the rental yield.

If done right, investing in a rental property can be an effective way to build wealth, so investors need to plan carefully and have an unyielding commitment to succeed in this kind of financial endeavor.

What is rental yield?

One of the most important factors property investors need to consider before diving in is the property’s potential return or its rental yield.

Industry experts define rental yield as the measurement of future income on an investment property. It is often calculated as an annual percentage based on the property’s cost or market value. Another thing to note is that capital gain is not considered when calculating rental yield.

What are the types of rental yield?

Yield also comes in several forms and a deep understanding of how these are different from each other is important for investment success.

Gross rental yield

This is the income an investment property makes before expenses are deducted. It is calculated by taking the annual rental income, dividing it by the property value, and then multiplying it by 100.

Here is a sample calculation for a $650,000 property with a rental rate of $350 per week:

Gross rental yield: ($350 x 52) = $18,200 / $650,000 x 100 = 2.8%

Net rental yield

This is the income an investment property makes after expenses have been deducted. These expenses include costs associated with buying the property such as stamp duty, legal fees, building inspections, and rental-related costs such as advertising and income loss due to vacancy. Repair and maintenance costs, management fees, and insurance premiums are also included in the calculation.  

Net yield is calculated by taking the annual rental income and then subtracting the yearly expenses. The difference is then divided by the property’s value and then multiplied by 100.

Here is a sample calculation for the same property above with total expenses of $4,000:

Net rental yield: ($18,200 - $4,000) / $650,000 x 100 = 2.18%

Return or total return yield

A return is defined as the gain or loss made on an investment during a specified period and where capital gain is included. Unlike yield, which is reliant on the property’s market performance, return is focused on the investment’s future earning potential.

According to many experts, rental yield should not be a sole consideration when investing in property, adding that a balance between rental yield and capital growth plays a crucial role in helping investors achieve a sustainable portfolio.

However, they also say that properties with high rental yields would still be best for investors looking to boost their cash flow. Ideally, investors should aim for a gross rental yield of above 5.5% as this shows stability in the rental income.

Which suburbs offer the highest rental yields in Australia?

The key to finding high-yield rental properties is to look for suburbs that have both affordable property prices and relatively high rental returns. These areas are typically located outside major capital cities, which often have expensive housing and lower yields.

According to Your Investment Property, here are the top three suburbs in each state with the best rental yields and most affordable prices.

State/Territory

Suburb (House/Units)

Property type

Median Price

Gross Rental Yield

New South Wales

Warren (H)

H

$162,500

9.6%

Sussex Inlet (H)

H

$600,000

9.7%

Sussex Inlet (U)

U

$507,500

9.3%

Victoria

Donald (H)

H

$184,000

7.3%

Murtoa (H)

H

$145,000

7.7%

Warracknabeal (H)

H

$180,000

7.2%

Queensland

Pioneer (H)

H

$180,000

11.8%

Blackwater

H

$155,000

10.7%

Dysart (H)

H

$145,000

10.8%

Northern Territory

Tennant Creek (H)

H

$260,000

8.4%

Gillen (U)

U

$244,500

8.5%

Karama (U)

U

$232,750

8.3%

South Australia

Port Pirie West (H)

H

$110,000

10.9%

Port Augusta (H)

H

$160,000

9.4%

Victor Harbor (U)

U

$308,000

9.9%

Western Australia

Kambalda East (H)

H

$85,000

12.2%

Bulgarra (U)

U

$200,000

10.4%

Kambalda West (H)

H

$145,000

10.0%

ACT

Denman Prospect (H)

H

$604,000

9.5%

Taylor (H)

H

$492,500

7.7%

Curtin (U)

U

$327,000

6.8%

Tasmania

Queenstown (H)

H

$156,000

8.3%

Zeehan (H)

H

$150,000

7.4%

Strahan (H)

H

$270,000

6.7%

Source: CoreLogic. Data is reported to the period ending January 2022. Last updated April 2022.

How do I know if I picked a good investment property?

Experts say a good property can either make or break an investor. This is the reason why careful planning and due diligence are crucial when searching for the ideal investment property.

Here are some indicators that the rental property you picked is the right one.

1. Location

A property’s location has a major impact on the rental demand, tenant quality, and rate of returns. If the property is in a high-growth market, these factors will likewise increase.

Some good indicators of a high-growth area include a growing population, proximity to public amenities, a vibrant job market, low crime rate, accessibility to public transportation, favourable taxes, and affordable insurance rates.

2. Condition of the property

When selecting a rental property to invest in, it is advisable to conduct a thorough home inspection to know if the property is in good condition.

The property should be tenant-ready as repair and maintenance expenses can eat into an investor’s funds and can have a huge effect on cash flow.

3. Number of listings and vacancies

An area with a low number of listings and vacancies generally shows a strong rental market. Low vacancy rates also allow landlords to raise rental prices to boost returns.

4. Positive cash flow

A rental property should be able to generate a strong positive cash flow every month. This means the income a property generates is more than enough to cover everything that a landlord puts into it.

5. Potential for capital growth

Apart from cash flow, investors should be able to generate profit from the rental property.

The most common metric used to determine profit is cash on return because it factors in how the investment property is being financed. Experts say a good rental property can make cash on a return of about 8% or more.