Working out Rental Yields

This is a great article from Accountants Perriam & Partners on working out rental yields. 

www.perriams.co.nz

"Often you will hear or read the term "property yield".

If you have never been sure as to how to calculate it here is a simple but practical way.

Gross Yield

Annual Rental (say) 440 per week                 22,880

Esimated current value of your property    475,000

Gross Yield (22,880/475,000)                         4.8%

Net Yield

As a rule of thumb apply a 2% factor to allow for rates, insurances, maintenance management etc.   2.0%

Net Yield (22,880-9,500 = 13,880/475,000)      2.80%

Clearly 2.8% lets (say) 3% is not sufficient to cover your interest rate and inevitably the property will require a top up.

The only reason we are prepared to top up this type of investment must be solely due to the anticipated captial growth.  If it were not for this you would always be better off with your money in the Bank.

Can our property values keep growing at the average annual capital growth that we have come to expect?

What would an ideal yield be for this property?

The ideal yield would be around 7% as this would cover your interest rate (say) 5% and outgoings (2%).  A 7% yield equates to a weekly rental of around $640 which is clearly very unlikely on a property at $475,000.

Perriams advice

Chase the best yield you can get.  It's the tenants that you want paying the bills not you."