Understanding Rental Yields as an Investor

Rental yields are one of the most important concepts that property investors need to understand. As with any rental property it is important to understand the rental yield of your DHA (Defence Housing Australia) property to make better informed decisions on which DHA property will suit your financial strategy the best.

Rental yield is simply how much income your rental property is earning, as a percentage of the value of the property. For example, if we use example of a DHA property priced at $500,000 and it is renting out for $500 per week, then the rental yield is going to calculated by using the the annual rent, divided by the price, which results in a yield of 5.2%.

$500pw x 52 weeks per year = $26,000 per year rent

$26,000 pa / $500,000 property value = 5.2% yield

You can also use our rental yield calculator to accurately determine the rental yield of your investment property.

Rental yield is an important metric to understand when purchasing a DHA investment property, as it can give you a clear indication and understanding how much income you might receive from your investment, and importantly, it can help you compare the returns on your DHA investment to other types of investments.

Positively or Negatively Geared

For property investors, perhaps the most important consideration of all is how high the rental yield is compared to the interest rate on your mortgage.

If you have a mortgage interest rate of 5% and your rental yield is 5%, then your rental income would most likely be covering your mortgage repayments, not including the other expenses you incur with your DHA property such as Annual Rates or Insurance.

If your rental yield is higher, say 7%, and you have a 5% mortgage interest rate, then you will likely be earning money every month. This is called being positively geared. On the flip side, if your rental yield is 3% and your mortgage interest rate is 5%, then you would need to pay money out of your own pocket to hold onto the property. This is what’s known as negative gearing.

Location and Property Type

One of the most important factors that determines how high a property's rental yield is, normally comes down to the location of the property.

Typically, properties in Sydney and Melbourne that have very high property prices would normally have lower yields. When you purchase these properties, you are almost certainly looking at a property that will be negatively geared.

On the flip side, properties in the smaller capital cities or regional areas will normally have lower prices, and this can often lead to properties that have higher yields overall.

At the same time, the type of property also makes a difference. Houses, which are usually more expensive relative to units, will normally have lower yields. While units often have yields at or around 5%.

There are also ways to get even higher yields on properties. Things like dual occupancy properties or properties with a granny flat attached will have multiple income streams from more than one tenant, and this can attract a higher overall income and therefore rental yield.

Net vs Gross

When looking at rental yield, the number itself is usually a gross measure, meaning that no other expenses are factored in.

Generally, things like council rates, property care/management fees, strata fees, and repairs and maintenance aren't included.

Similarly, your rental yield might not truly reflect how much you are making on the property. For example, if you have a lower LVR, meaning that you have purchased a property with a large deposit or your equity has grown a lot over time, you are likely going to be receiving a far higher net yield than another person with a similar property who owes more on their loan.

The same type of thing happens when your rents keep growing over time. Going back to the first example, if your property cost you $500,000 but the rents have increased by 25%, then your rental yield has actually gone up to 6.5%.

Rental yield is an important number to consider when you're weighing up different types of investment properties and needs to be considered in conjunction with how much your interest rates on your mortgage are likely to be.

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