The ‘yield’ is the money produced as a return on investment, shown as a percentage of the money invested.
Property investors are concerned with the ‘rent yield’, i.e the amount of rent per annum that the property will return to the investor.
The rent yield is calculated by annualising the rent and dividing it by the cost of the property.
Eg. a property offered for $500,000 with a market rent of $500pw has a rent yield of:
$500pw x 52 = $26,000 ÷ $500,000 = 5.2% yield
Gross yield is the total rent divided by the property price, whereas Net yield takes into account the costs associated with management of the property, i.e. what you actually get in the bank each week/month.
Rent yields tend to fall as property prices rise. This is because there is a limit to how much tenants can pay each week. For example if a property worth $750,000 was receiving a 5.2% yield, it would mean that the weekly rent was set at $750pw, but if housing prices rise and the same property is now valued at $1million; to maintain the yield, the rent would need to rise to $1000pw! It is a small segment of the market that can afford to pay this.
This is why, all other things being equal, it is better to purchase two properties for $500,000 than it is one at $1million.
There are also benefits to diversifying and not having “all your eggs in one basket” as well as the fact that you can ‘divest’ in parts, not the whole lot at once, ie a $500,000 property is usually more ‘liquid’ than a $1M one.
Regional areas often offer attractive yields for this reason; property prices are low relative to the metropolitan area. The downside may be that the rate of capital appreciation in regional areas may be quite slow. Ideally, a combination of yield and growth potential is what the investor is looking for.