Rental yields really matter for investors as they determine the level of income you receive compared to your investment. We take a look at what affects rental yields and why you need to know about them.
Maintaining a strong rental yield is critical to most investment property owners as it affects the income received from an investment property. Understanding the factors that affect them can help you make better property management decisions.
What Are Rental Yields Exactly?
Rental yields are calculated by dividing the total rent for the property by the property’s value.
- Gross Yield = Annual rental income (the weekly rental x 52) / property value x 100
- Net Yield = Annual rental income less annual expenses and costs/ property value x 100
The following 9 factors can all affect your rental yield:
1. Property Prices
Property prices and rental yields are inversely related: When property prices go up, rental yields fall, and vice versa. Note that rental yield is different from rental income. Rental incomes do not necessarily rise and fall with market cycles but tend to rise more slowly over time in line with inflation.
Popular areas, such as those that are beachside or located near the inner city, can attract higher rents due to greater demand. Eastern suburbs including Kensington, Clovelly, Bronte and Bellevue Hill have seen rental demand increases ranging from 4.5 to 25 per cent in recent years, with more tenants looking for homes in these areas. Beachside areas also tend to be more popular in summertime, which can drive up rents, therefore yields.
Large infrastructure projects, such as hospitals or new transport links, tend to drive property price growth, which in turn affects rental yields. For example, suburbs including Randwick and Kingsford along the Sydney light-rail to the CBD in the east have already seen strong growth. Randwick prices have risen by 73.52 per cent during the past five years to $2.516 million, and Kingsford prices by 103.7 per cent to $2.2 million.
Similar to infrastructure, proximity to schools doesn’t just affect home that are for sale. Renters will also pay more rent and compete more for a home in a desirable school catchment area. So this means changes in school catchment areas can have an influence too.
5. Interest Rates
Rising interest rates can push the cost of finance out of the reach of first home buyers and cause fewer people to buy. This in turn increases demand for quality rental properties, which means that rents can be raised. When rates are low, there are typically more investors and first home buyers in the market.
6. First Home Owners Grant
Positive changes to the First Home Owners Grant can also attract more first home buyers to the market, which decreases the numbers of renters in the market. However, this increased activity also tends to drive property prices up.
People want to live close to work. The economy of a city or suburb where a property is located – for example, if a major business or industry is emerging or leaving the area – can drive property prices up and down.
8. Weather And Season
According to research by realestate.com.au, one of the biggest drivers of rental demand is weather, with demand decreasing at the start of winter and going up again in the spring. This is particularly true in beachside areas. For example, Bondi has the biggest winter dip in all of Australia, but demand in other suburbs can drop by upwards of 20%. It’s not only coastal areas that are affected by the seasons either – realestate.com.au’s data shows Surry Hills seeing a dip of 17% in winter.
9. Vacancy Rates
The laws of supply and demand dictate that the scarcer rental properties are in desirable areas, the higher rents will rise. Yet in markets where there is an oversupply of units, the opposite can be true.
When rental growth is slowing or there is a lot of new housing stock in a market, investors need to find new ways to differentiate their properties. With an influx of new units, we’re seeing this in the Eastern Suburbs right now. You can read more about how to solve it in our article How to Deal with Challenges in Sydney’s Rental Market.
To find out more about how Taylors can add value to your investment portfolio, contact our team of specialists today.