Are you considering purchasing an investment property in Nelson Bay? If so, you are likely in the middle of researching the potential rental yield of the current properties for sale in Nelson Bay.
Calculating rental yield is a good place to start when you are deciding whether or not a property has the potential to be a good investment.
Rental yield is a measure of the return on investment for a rental property, determined by calculating the gap between your overall costs and the income generated. It helps assess the profitability of a rental property and can be used to compare investment options.
A high rental yield indicates a property is generating a significant return on investment, while a low rental yield suggests the property is not performing well as a rental investment.
Residential vs commercial
Residential and commercial investment properties are different types of properties that are used for different purposes. Key distinguishing features include:
- Tenants: Residential properties are typically leased to individuals or families for use as a primary residence, while commercial properties are leased to businesses for use as office, retail or industrial spaces
- Lease terms: Residential leases are often shorter, while commercial leases can be much longer
- Income: Residential properties normally generate rental income from one or a few tenants, while commercial properties can generate rental income from multiple tenants
- Operating expenses: Residential properties generally have lower operating expenses, such as utilities and property taxes, while commercial properties may have higher operating expenses, like elevators and security systems
- Zoning and regulations: Residential properties can be subject to different zoning and building regulations than commercial properties, which can affect the property's use, maintenance and development potential
- Risk: Residential properties are considered less risky than commercial properties, as commercial properties have a higher possibility of vacancy and tenants can be very specific on location, size and the condition of the space
When it comes to calculating rental yield, the process is similar for both. However, what’s considered a good rental yield may be influenced by the above factors, among others.
Calculating gross rental yield
Gross rental yield can be calculated with the following steps, and applied to both residential and commercial properties:
- Determine your annual rental income (weekly rental income multiplied by 52)
- Divide your annual rent by the property’s value
- Multiply that figure by 100
Gross rental yield = (annual rental income / property value) x 100
Gross rental yield example: John purchased a property for $500,000 which he rents out for $400 per week
(400 x 52) / 500,000 x 100
The gross rental yield is 4.16%
Calculating net rental yield
Net rental yield is slightly more complicated, but can be calculated with the following formula:
- Determine your annual rental income (weekly rental income multiplied by 52)
- Subtract the total annual expenses
- Divide that figure by the value of the property
- Multiply that figure by 100
Net rental yield = (annual rental income – annual expenses) / (property value)) x 100
Some of the expenses you might consider including are:
- Repairs & maintenance
- Council rates
- Property management fees
- Legal fees
- Advertising
- Insurance
- Depreciation
- Vacancy costs
- Building inspections
- Agency fees
Net rental yield example: John purchased a property for $500,000 and now receives $25,000 each year in rent but pays $10,000 in expenses annually.
(25,000 – 10,000) / 500,000 x 100
The net rental yield is 3%
What is a good rental yield?
The average rental yield can vary depending on factors such as location, property type and local real estate market conditions. What’s considered a good yield can also change over time as rental income and property values fluctuate.
Generally, a higher percentage indicates stronger cash flow, but an overly high rental yield may come at the cost of lower or slower capital growth potential and can mean the property is undervalued.
As a guide, a high rental yield would generally be considered between 8-10% while a low rental yield might be closer to 2-4%.
Contact Us
If you’re interested in purchasing and investment property in Nelson Bay and are after more detailed information on the average rental yields of properties in the region, don’t hesitate to reach out to our team at Nelson Bay Real Estate on 02 4981 2655 to make an appointment with one of our local real estate agents.