soho-logo-Hoz-Light

What is a Good Rental Percentage?

November 28, 2023
What is a Good Rental Percentage?

Key takeaways:

    • Rental yield compares the income generated from renting a property to the overall costs or purchase price.

    • Gross rental yield is calculated by dividing the annual rental income by the market value of the property.

    • Net rental yield takes into account the expenses of owning the property.

    • A good rental yield is typically between 5% to 8% gross rental yield, but it depends on location and investment goals.

Rental yield is an important factor to consider when investing in property. It measures the income generated from renting out a property compared to the overall costs or the purchase price.

There are two types of rental yield – gross rental yield and net rental yieldGross rental yield is a simpler calculation that looks at the rental income over a year divided by the market value of the property. Net rental yield takes into account the expenses of owning the property, such as insurance, repair costs, and legal fees.

Determining a “good” rental yield varies by location and investment goals. Generally, in metropolitan areas, especially state capitals, gross rental yields range from 3% to 5%. Yields below 3% often belong to luxurious properties.

In contrast, regional areas may have higher gross rental yields, exceeding 5%​​. Traditionally, a good gross rental yield was considered to be between 5% and 8%​. However, this figure can fluctuate, and a high rental yield may indicate lower capital growth potential.

For instance, properties with high rental yields (8-10%) might be undervalued, while those with low yields (2-4%) could be overvalued​​ according to Westpac.

However, high rental yields may come with potential trade-offs, such as lower capital growth potential. It’s important to consider factors like location, demand, and market conditions when evaluating rental yield.

How to Calculate Rental Yield

Calculating rental yield is a crucial step in assessing the potential income and return on investment of a property. There are two types of rental yield: gross rental yield and net rental yield. The gross rental yield is a simple calculation that compares the annual rental income to the purchase price of the property.

To calculate the gross rental yield, divide the annual rental income by the purchase price and multiply it by 100. For example, if the annual rental income is $20,000 and the purchase price is $400,000, the gross rental yield would be 5%.

However, the net rental yield provides a more accurate picture by taking into account the expenses associated with owning the property. These can include insurance, repairs, maintenance, and property management fees. To calculate the net rental yield, subtract the total expenses from the annual rental income, divide it by the purchase price, and multiply it by 100.

The net rental yield calculation allows investors to factor in the costs of owning the property, providing a clearer understanding of the actual return on investment.

By calculating both the gross and net rental yield, investors can gain valuable insights into the income potential and profitability of a property. It’s important to consider both figures and analyze them in the context of market conditions and investment goals.

Table: Rental Yield Calculation Example

Annual Rental IncomePurchase PriceTotal ExpensesGross Rental YieldNet Rental Yield
$20,000$400,000$5,0005%4.75%

What is a Good Rental Percentage in Melbourne?

When considering property investment in Melbourne, understanding the current rental yields is crucial. As of 2023, the rental yields in Melbourne show distinct figures for different types of properties:

  • Houses: Rental yields for houses in Melbourne are currently around 2.92%. However, there has been a notable improvement over the year to March, with house yields jumping 7.5% to 3.3%​​.
  • Units: The yield for units stands at about 3.4%​​.
  • Overall Gross Rental Yield: In May 2023, Melbourne’s gross rental yields were at 3.5%, slightly below the national figure of 3.9% and a combined capital result of 3.7%. These yields have stabilised below the pre-Covid decade average of 4.2% (nationally)​​.

It’s important to note that these figures can vary based on specific locations within Melbourne and the type of property. Investors should consider these yields in the context of their investment goals and the broader market conditions in Melbourne.

Regular analysis of market trends and changes in rental yields is essential for making informed decisions in the property market.

3 Factors to Consider and Ways to Improve Rental Yields

When aiming to maximise rental yields, there are several key factors that investors should carefully consider.

1. Location

One of the most important factors is the location of the property. Different areas may have varying levels of demand and rental potential, so it’s crucial to research and analyze the rental market in specific locations.

For example, understanding whether it is cheaper to rent in Melbourne can influence investment decisions in that city.

Additionally, factors such as proximity to amenities, public transportation, and desirable neighbourhoods can significantly impact the rental yield. Knowing the average cost of an apartment in Melbourne helps in making informed decisions about property investments in such urban areas.

2. Property type

Property type is another crucial consideration. Certain types of properties, such as apartments or townhouses, may attract higher rental yields compared to single-family homes. Investors should assess the demand for different property types in the local market to make informed decisions that align with their rental yield objectives.

3. Supply and demand

Supply and demand dynamics in the rental market also play a crucial role in determining rental yields. Understanding the balance between the number of available rental properties and the demand from tenants can help investors identify areas with strong rental demand and the potential for higher yields. 

4. Economic conditions

Economic conditions, such as employment rates and population growth, can also impact rental yields, making it essential to monitor these factors.

Furthermore, regularly analyzing rental yield benchmarks is vital to ensuring the performance of your investment aligns with the market. Local rental yield benchmarks can provide a useful reference point for evaluating the performance of your property’s rental yield.

It’s important to note that rising property prices in capital cities have caused rental yields to decline, creating opportunities in regional areas where rental yields have increased. Investors should keep an eye on property prices and rental trends to identify areas with potential for improving rental yields.

To improve rental yields, several strategies can be employed. Renovating properties to increase rental value, enhancing the property’s curb appeal and presentation, and utilizing high-quality photography and staging techniques can attract tenants willing to pay higher rents.

Other methods include:

  • Adding value by providing off-street parking and storage options
  • Creating appealing outdoor spaces
  • Allowing pets
  • Updating appliances to meet the expectations of tenants

Conducting regular rent reviews and comparing with market rates are also essential to ensure rental yields remain competitive and in line with market demand.

For those interested in the Melbourne market, exploring real estate to rent in Melbourne can provide insights into current rental trends and opportunities.

Suggested reading: Make sure to also check out our in-depth look at Melbourne’s rental market in our article, is there a shortage of rental properties in Melbourne?, to supplement the information you find here.

FAQs on ‘What Is a Good Rental Percentage?

What is the average return on property investment in Australia?

The average rental yield in Australia is around 8%, with 1% accounting for ongoing costs such as dues, strata, and insurance fees. This information, however, needs verification from a current and reliable source as it may vary based on market conditions and locations.

What is the 5-year rule for investment properties in Australia?

The “six-year rule” in Australia allows for capital gains on a rental property to be tax-free if you move back into the property and live in it as your main residence for at least six months after renting it out for a period, say five years.

This rule resets each time you move back in. However, specific details and conditions should be verified with a tax professional or relevant authority.

Should I pay off my investment property quickly in Australia?

Paying off your investment property in Australia can be a good idea, especially if it is not generating profits. Converting a non-performing liability into a cash-generating asset can be beneficial, particularly before retirement. The decision, however, should be based on individual financial situations and goals.

How long should you keep an investment property?

The average time an investor holds onto their property in Australia is typically 7-10 years. However, this is not a strict rule. Factors such as market conditions, personal financial goals, and changes in life circumstances should guide the decision to sell an investment property.

Soho
Soho is your expert team in Australian real estate, offering an innovative platform for effortless property searches. With deep insights into buying, renting, and market trends, we guide you to make informed decisions, whether it's your first home or exploring new suburbs.
Share this article
soho-logo-Hoz-Light
Don’t waste time searching for a home. Let our AI do the work

Latest

Soho logo

Our AI match engine will match you with over 150,000+ properties and you can swipe away or shortlist easily. Making your home buying journey faster and easier 

Soho logo
Our AI match engine will match you with over 150,000+ properties and you can swipe away or shortlist easily. Making your home buying journey faster and easier.