How Do I Calculate Yield on an Investment Property?

When you’re looking for an investment property, you are often either looking for capital growth or yield. Yield is the income you receive in rent, ideally giving you a positive cash return. The projected yield is treated as income by the bank when assessing your mortgage application.

Doing the maths can feel a bit intimidating when you’re new to the investment game but don’t worry, there’s a quick and easy trick that we use to calculate yield on any property we’re looking at.

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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