How Do I Calculate Yield on an Investment Property?

Calculating yield

You’re going to need the following bits of information:

• the purchase price &
• the rental income per week

You then divide the yearly rental income by the purchase price.

As an example, a $600,000 property might receive $500 per week rent.

$500 * 52 weeks is $26,000

$26,000 / $600,000 is 0.043 (or 4.3% return).

So this property has a 4.3% (gross) return based on rental income to value alone.

Information from the yield

A 4.3% return would cover most principal and interest payments (currently) but probably won’t cover additional expenses like insurance and rates.  Each individual property requires a different amount of income to get positive cash results. What we’re looking for is a quick calculation to see how one property compares to another.

The 5% test

Let's say that 5% yield is a decent baseline for yield on a property.  If we're looking for yield, anything below that is probably not worth investigating any further.  What is a quick calculation to get 5% return?

Well, very approximately:

If weekly rental is 1/1000th of the value of a property, the yield is around 5%

In the example above, the house was worth $600,000.  If the rent had been $600 per week, then:

$600 * 52 weeks is $31,200

$32,000 / $600,000 is 0.052 (or 5.2% return)

The 2 second calculation of minimum yield required

This is satisfyingly easy. For any property you are looking to purchase, knock the last 3 numbers off and you have the approximate weekly rent required to get to around 5% yield.  A $750,000 property needs a $750 per week rent.  A $400,000 property needs a $400 per week rent.

How does the projected yield relate to your mortgage application?

Currently banks calculate affordability of an investment property by scaling the projected yield to 65-75%. This is to reflect that there may be periods where the property isn’t tenanted, as well as costs such as rates, taxes, insurance and maintenance. 

Example: Take a property with an expected rental income of $50,000. The bank could calculate the income based on 65% of that, making the “usable” income $32,500. 

For more detail on how the bank decides whether or not to approve a mortgage application for an investment property, see our article Can I buy an investment property? Or better yet, contact one of our mortgage brokers to get advice specific to you.

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