Investor basics: What is rental yield and why does it matter?
LVRs, loan to income ratios, rental yields, conditional pre approval. All the property investment jargon might have you Googling definitions rather than searching for a property to help you meet your financial goals.
Here at Goodlife Financial Advice, we aim to talk about property in a way that everyone can understand – it doesn't have to be complicated and confusing. That's why we've come up with our investor basics series, to help you get your head around residential property investment.
This week, we have a closer look at rental yield and why it's so important for new investors.
What is rental yield?
Gross rental yield is your property's annual rental income expressed as a percentage of its total value. Working it out is simple. Let's say you bought a property for $500,000, and you received $25,000 a year in rent. Its rental yield is simply $25,000 divided by $500,000, multiplied by 100, which equals 5 per cent.
It's important to differentiate between gross and net rental yields. The latter of these takes into account all expenses involved in maintaining and keeping a property, giving you a more accurate idea of your investment's returns.
What does it mean for you?
If you find a property with a higher yield, you'll receive more rental income relative to the size of your mortgage.
As a new property investor, you'll have a number of expenses to take care of – from property maintenance to mortgage repayments and council rates. Luckily, you have your rental income to take care of that, and this is where rental yield is so important.
If you find a property with a higher yield, you'll receive more rental income relative to the size of your mortgage. That means you'll be able to cover more of those extra expenses with your rental income and your property will require less cash to maintain.
If you know where to look (like we at Goodlife do!) it could be possible to find properties that are cash flow neutral from day one.
How can you find the best yields?
When searching for high yielding residential investment property, there's a few locations you should go to first:
- Auckland yields are generally low, but buy a new build on the city fringes and you may strike gold.
- Christchurch: QV lists several suburbs in the southern city with average yields over 5 per cent.
- Whangarei offers affordability and areas with average rental yields of up to 5.5 per cent.
- The right property in Tauranga can net brilliant results, with yields around 4 per cent.
- Hamilton offers yields towards 5 per cent, accompanied by rapid value gains.
To find a property that will meet your goals, you should also consider value gains. These are a property investor's bread and butter, and finding a sweet spot between gains and high yielding property should be your goal.
If you're thinking about property investment, sooner is always better than later. That's where the team at Goodlife come in handy. We specialise in making sure that planning for your financial security is as easy, stress-free and successful as possible.
We've helped hundreds of Kiwis make their money work for them – and we'd love to help you, too.
Here's to your financial independence!
Authorised Financial Adviser / Investment Property Specialist
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