How to Calculate Yield on an Investment Property (And Why It Matters)
When it comes to investing in property, yield is one of the most fundamental numbers you need to understand. It tells you how much income a property generates in relation to its cost. And when you're deciding between multiple properties, it's yield that helps you compare apples with apples.
Unlike buying your own home (where the debate might centre around whether a pizza oven is a must-have), investing in property is about numbers. Yield helps you decide whether a property stacks up financially. It's also something the banks will look at closely when you apply for an investment mortgage. So let’s break it down.
What is Yield?
Rental yield is the amount of rental income your property generates over a year, expressed as a percentage of the property’s value. It's the property's "income return" and is a handy way of comparing how much value you’re getting for your investment.
There are two main types of yield:
Gross yield: Calculated before expenses.
Net yield: Takes expenses into account, giving a better view of the property's actual profitability.
How to Calculate Gross Rental Yield
To calculate gross rental yield, you need two pieces of information:
The weekly rent
The property’s purchase price (or current market value)
The formula is:
Gross yield = (Weekly rent x 52) / Property price x 100
For example, say a property costs $600,000 and earns $500 per week in rent:
$500 x 52 = $26,000 per year
$26,000 / $600,000 = 0.0433
0.0433 x 100 = 4.33% gross yield
This means the property generates 4.33% of its value in rental income each year, before expenses.
A 2-Second Rule for Estimating 5% Yield
If you're on the go and need a quick way to estimate a 5% gross yield, there's a handy shortcut:
Remove the last three digits of the purchase price = required weekly rent.
So a $750,000 property needs $750/week rent to deliver roughly 5% gross yield. Likewise, a $400,000 property would need $400/week. It’s not perfect, but it’s fast—and gives you a feel for whether the rent stacks up before you dive into detailed calculations.
What is Net Rental Yield?
Gross yield doesn't consider the real-world costs of owning a rental. That’s where net yield comes in. It shows the actual profit from your investment after paying for things like insurance, rates, maintenance, property management, and vacancies.
The formula is:
Net yield = (Annual rent – Annual expenses) / Property value x 100
Using the same example:
Rent: $26,000 per year
Expenses: $5,000 per year
Property price: $600,000
$26,000 - $5,000 = $21,000
$21,000 / $600,000 = 0.035
Net yield = 3.5%
This gives a more realistic view of what the property is actually returning.
Common Expenses for Investment Properties:
Rates
Landlord insurance
Property management fees
Repairs and maintenance
Body corporate fees (if applicable)
Vacancy periods (e.g. when finding a new tenant)
What’s not included in net yield:
Mortgage repayments
Interest costs
Income tax
How Banks Use Yield in Mortgage Applications
When applying for an investment loan, banks don’t use the full rent amount as income. They generally scale it back to account for potential vacancies and operating costs.
Most banks will only consider 65% to 80% of rental income as usable income in your application.
For example, if your rental income is $50,000 per year:
65% of $50,000 = $32,500
That’s what the bank considers as income when assessing your ability to repay the loan
This conservative approach helps the bank factor in times the property might be vacant, or unexpected maintenance costs.
Should You Prioritise Yield or Capital Gains?
That depends on your goals. Generally:
High-yield properties are great for investors seeking cashflow or income to cover mortgage costs.
High-capital-gain properties may generate less rental income but grow more in value over time, building long-term wealth.
Properties in regional or lower-cost areas often have higher yields, but slower capital growth. Prime city locations might have lower yields but stronger growth over time.
Ideally, a balanced portfolio contains a mix of both.
What Is a Good Rental Yield in NZ?
Yields vary based on region and property type. A 5% gross yield is a common benchmark used by many investors. But remember:
Auckland and Wellington often have yields around 2.5% to 4%, offset by strong capital growth.
Regional areas like Invercargill, Whanganui, or Rotorua may see 5% to 7% yields but slower growth.
Websites like Tenancy Services and CoreLogic offer helpful rental yield indicators.
Does a Low Yield Mean a Bad Investment?
Not necessarily. If you're aiming for capital gains, a property with a lower yield might still make sense. But you'll likely need to top up the mortgage payments from your own pocket until the property increases in value or rents rise.
On the other hand, properties with high yields may offer less appreciation but generate positive cashflow from day one.
Ways to Improve Your Yield
Add a minor dwelling or sleepout
Update kitchens and bathrooms to justify higher rent
Allow pets (more tenant demand = potentially higher rent)
Furnish the property for short-term rentals
Target dual-income setups like boarding houses or co-living
Yield Is Just the Start
Yield is one of the first things to check when analysing a potential investment, but it’s not the only number that matters. Look at:
Vacancy rates in the area
Future capital growth potential
Property condition and maintenance requirements
Demand for rentals
Zoning changes or new infrastructure planned
Calculating Yield
Calculating yield doesn’t need to be complicated. Start with gross yield to compare options quickly, then work out net yield to understand your real return. Always factor in both income and potential capital gain.
And remember, while banks look at scaled-down rental income, a high-yielding property can help you qualify for more borrowing or reduce your risk of needing to top up repayments.
If you’re building a portfolio, understanding how yield works is one of the most powerful tools in your property investment toolkit.
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