The yield is the return on investment,
shown as a percentage
of the money invested
Property investors are concerned with the ‘rent yield’, i.e. the amount of rent per annum that the property will deliver to them.
The rent yield is calculated by annualising the rent and dividing it by the price of the property.
E.g. a property offered for $500,000 with a market rent of $500pw has a rent yield of:
$500pw x 52 = $26,000 ÷ $500,000 = 5.2% yield
Gross yield is the total rent divided by the property price, whereas Net yield takes into account the costs associated with owning the property, i.e. what you get in the bank each week/month.
Rent yields tend to fall as property prices rise because there is a limit to how much tenants can pay each week. For example, if a property worth $750,000 were receiving a 5.2% yield, it would mean that the weekly rent was set at $750pw, but if house prices rise and the same property was resold for $1million; to maintain the yield, the rent would need to increase to $1000pw! It is a small segment of the market that can afford to pay this.
This is why, all other things being equal, it is better to purchase two properties for $500,000 than it is one at $1million.
It’s having ‘two pots on the boil’ instead of one and the yield is likely to be higher for a lower-priced property.
There are also benefits to diversifying and not having ‘all your eggs in one basket’ as well as the fact that you can ‘divest’ in parts, and not have to sell the whole lot at once, i.e. a $500,000 property is usually more liquid than a $1M one.
Regional areas often offer attractive yields for this reason; property prices are inexpensive relative to the metropolitan area. The downside may be that the rate of capital appreciation in regional areas may be quite slow.
For the investor, a combination of yield and growth potential is ideal.