How rental yield works: A practical guide for property investors

Promoted by loans.com.au

Many investors use “rental yield” loosely, and a few common slip-ups (e.g. not stating whether it’s gross or net or using inconsistent denominators) can make the number look better or worse than it really is.

What is rental yield?

Rental yield offers an income snapshot useful in comparing different properties, suburbs, or property types. At its core, it answers the question: How much rent do I get each year relative to the property’s price or value?  

While rental yield is a good starting point for comparing income potential, it is only one part of the performance as it doesn’t include capital growth, tax outcomes, or the impact of your loan structure. It is a ratio, not a bottom-line result. 

Yield ≠ profit

Yield tells you how much rent comes in relative to the property’s value/price (e.g., annual rent ÷ value). It typically doesn’t include the costs that determine whether you actually “make money”, such as:

• Property management and letting fees

• Strata/body corporate levies

• Council rates and insurance

• Repairs and maintenance

• Vacancy (weeks with no rent)

• And, often, mortgage costs (interest and principal)

Quick note: A property can show a “solid” gross yield on paper but still deliver little profit or a cashflow loss once costs are accounted for.

Yield ≠ total return

Total return is broader: it combines income (net rent after costs) plus capital growth (changes in the property’s value over time). That’s why a lower-yield property may still perform well overall if it experiences stronger capital growth, while a higher-yield property may perform less well overall if price growth is weaker or costs are higher.

To illustrate what this means, let’s look at these two properties as an example:

Property A: 3% yield, 7% capital growth → potential total return ≈ 10% (before costs/tax)

Property B: 6% yield, 0% capital growth → potential total return ≈ 6% (before costs/tax)

Many investors often use yield as a starting point, then assess net cash flow, expected growth, and risks before deciding whether an investment property is “good”.

Gross vs net rental yield: What’s the difference?

When it comes to rental yield, there are two versions. Gross rental yield uses rent before costs and expenses (good for quick comparisons); meanwhile, net rental yield subtracts ongoing landlord costs and, often, vacancy (better for assessing how a property performs). 

Gross rental yield

Gross rental yield looks at rental income before property expenses. It’s useful for fast comparisons because you can calculate it from headline rent and price/value figures. 

Net rental yield

Net rental yield goes a step further by subtracting typical landlord expenses first. This gives a more realistic sense of the property’s income performance, because ongoing costs like management fees, insurance and maintenance can materially reduce what you keep.

How to calculate gross rental yield

Gross rental yield formula:

Gross rental yield (%) = (Annual rent ÷ property value or price) × 100

To annualise rent:

• Weekly rent × 52, or

• Monthly rent × 12

Gross rental yield example

Let’s say:

• Property value: $700,000

• Rent: $650 per week

• Annual rent = 650 × 52 = $33,800

Gross yield = ($33,800 ÷ $700,000) × 100 = 4.83%

How to calculate net rental yield

There isn’t one universal “net yield” definition because investors include different costs. A practical approach is:

Step 1: Estimate annual rent actually received

Annual rent = weekly × 52 (or monthly × 12), then allow for vacancy if relevant (e.g., 2 weeks per year).

Step 2: Subtract annual running costs

Common inclusions:

• Property management fees/letting fees

• Council rates

• Water rates/charges you pay (depends on state/arrangement)

• Strata/body corporate levies (if applicable)

• Landlord insurance

• Repairs and maintenance allowance

• Advertising and routine compliance costs

Quick note: The ATO’s rental property guidance is a solid checklist for the kinds of expenses landlords may incur/claim (even though “net yield” itself is an investing metric, not a tax metric).

Step 3: Divide by property price/value and convert to a percentage

Net rental yield (%) = ((Annual rent − annual expenses) ÷ property value or price) × 100

Net rental yield example 

Using the earlier property ($700,000):

• Annual rent: $33,800

• Vacancy: 2 weeks → rent received ≈ $650 × 50 = $32,500

• Annual expenses (illustrative): $10,000

  • Property management: $2,200

  • Council/water/strata/insurance: $6,500

  • Repairs allowance: $1,300

• Net income: $32,500 − $10,000 = $22,500

Net yield: ($22,500 ÷ $700,000) × 100 = 3.21%

What to use as the “property price/value” in the denominator

This is where comparisons often become inconsistent, because changing the denominator can move the result without changing the property’s rent at all. 

The common denominators include: 

Purchase price 

Many Australian guides and explainers calculate gross yield using the property’s purchase price/cost, i.e. what you paid. It’s common for “what yield did I buy?” comparisons.

Current market value 

It’s also common to see gross yield described as annual rent divided by property value, which, depending on context, may mean current market value or an estimated value. It’s useful for “what yield does the property generate now?” assessments.

Total acquisition cost

This is often the most honest for your decision-making, even though it’s less common in headline yield stats and simple online calculators. It includes the purchase price plus buying costs such as stamp duty/transfer duty, conveyancing/legal costs, and initial works (if required).

If you include these costs in your denominator when assessing your investment decision, you’re measuring the yield on the total capital you actually had to outlay.

Whether you include initial repairs/renovations depends on what those works are. If they’re required to make the property rentable or effectively part of the acquisition/bringing it to lettable condition, including them gives a more realistic “all-in” yield.

Using the total acquisition cost as the denominator answers the question: “What yield am I earning on the total cash I had to commit?”

Rental yield with different denominators

To illustrate the difference when calculating rental yield with the same rent but using different denominators:

Annual rent: $30,000

Disclaimer: The values used are for illustrative purposes only. Costs vary by state and circumstances.

Should you include mortgage interest when calculating rental yield?

It depends on what you’re trying to measure. Some investors exclude finance costs to compare properties on a like-for-like basis. Others include interest to reflect a cashflow-style view. If you include interest, label it clearly so it isn’t compared with net yields that exclude finance costs.

For tax context, the ATO explains that interest may be deductible when it relates to earning rental income, but principal repayments are not.

Common rental yield mistakes to avoid

Using unrealistic rent

A common trap is using “best-case” asking rent rather than achievable rent. Also note that the advertised rent series can differ from the rents paid by all tenants (new and existing), which is why official statistics often separate these concepts.

Ignoring vacancy and one-off costs

Even short vacancy periods reduce the rent you actually receive. Letting fees, advertising, and initial repairs can also hit early returns.

Forgetting strata on units

Strata levies can materially affect net yield and may change over time.

Mixing denominators

Comparing yields based on purchase price for one property and market value for another can be misleading. Pick one approach and stick to it.

If you're ready to become a landlord, we offer competitive rates for investment home loans. We also offer bundled options designed to bring your owner-occupied and investment home loans together in one simple setup. Talk to one of our lending specialists today. 

Disclaimer: This article provides general information only and doesn’t consider your objectives, financial situation, or needs. It isn’t financial advice. Consider seeking independent advice before making financial decisions.  

Image by Max Vakhtbovych on Pexels