Investment fundamentals
High rental yield: what remains after the expenses?
A strong headline yield is only the starting point. Look at the costs, vacancies and funding behind it.
A rental property can advertise an attractive return while leaving its owner with much less cash than expected. Before comparing opportunities, separate the rent a property might earn from the money you may actually retain.
Start with the gross yield
Gross rental yield is annual rent divided by the purchase price, multiplied by 100. It is a useful first comparison, but it does not account for running costs or borrowing. Two properties with the same gross yield can produce very different outcomes.
A worked example
Imagine a property purchased for $800,000, with potential rent of $64,000 a year. Its headline gross yield is 8%. Allowing 5% for vacancy reduces the rental income to $60,800. If annual operating expenses total $16,000, the amount remaining before finance is $44,800.
| Illustrative annual calculation | Amount |
|---|---|
| Potential rent | $64,000 |
| Vacancy allowance | −$3,200 |
| Operating expenses | −$16,000 |
| Income before finance | $44,800 |
| Interest: $600,000 loan at an assumed 6.5% | −$39,000 |
| Cash remaining before tax and principal repayments | $5,800 |
Hypothetical illustration only. The interest rate is an assumption, not a loan offer or current market quote. Acquisition costs, tax, depreciation, principal repayments and changes in property value are excluded. Actual costs and outcomes vary.
Build a complete expense picture
Ask for a written budget covering management, insurance, rates, maintenance and any owner-paid utilities. Where rooms are leased separately, check who pays for internet, cleaning and shared-area upkeep. Include an allowance for repairs rather than assuming a new property will have none.
Test the weaker scenario
What happens if rent is lower, a vacancy lasts longer or borrowing becomes more expensive? A property should be considered alongside your cash reserves, debt commitments and long-term goals. At Consilium, the conversation begins with those objectives and the assumptions behind the opportunity.
Further reading: ASIC Moneysmart: buying an investment property and NAB: understanding rental yield.
General educational content only. This information does not take your circumstances into account. Obtain advice from appropriately qualified professionals before making an investment decision. Images are illustrative and do not identify a listed Consilium project.