How to calculate the return on your investment property

Find out how much your investment property is making you by calculating its rental yield.

3 minute read

If you’re thinking of purchasing a new investment property, or you’re unsure how much profit your existing investment property is generating, it’s well worth taking the time to understand rental yield.

What is rental yield?

Rental yield is the yearly revenue your investment property generates. It’s calculated based on a percentage of your property’s total value – and the higher the percentage, the better the yield.

Gross yield versus net yield

Gross yield is the total amount of revenue your property generates before any costs are taken into account. Net yield is the amount of take-home revenue after all associated costs have been deducted – such as tax, rates, mortgage repayments, insurance, maintenance, and more.

When looking at your property’s yield it’s important to acknowledge the difference, as the net yield is the actual amount of profit your investment property is generating.

Rental yield benchmark in New Zealand

Rental yields are highly dependent on the property market, which can vary significantly across the country’s different regions. So it’s tough to narrow it down to just one benchmark. This Rental Yield Indicator is a great place to start, providing a guide to average rental yields around New Zealand. Just remember that the numbers might not always be what you’d expect – for example, larger cities don’t always lead to the best rental yield. So before choosing where to buy, make sure you do your research. 

Looking at buying an investment property with low rental yield? Don’t let that put you off.

If you’re looking at buying an investment property with low rental yield, it might still be a good opportunity. Depending on the purchase price and the area’s potential, you might be able to make improvements that could both raise the property’s yield, and also lead to capital gains.

That’s why when buying rental property, it’s important to consider it from every angle.

Rental yield versus capital gains

Most investment properties tend to be purchased with the intent to generate either a high rental yield, or capital gains.

A high rental yield could cover your mortgage repayments, and help provide the cashflow you need to take care of costs like property maintenance and rates.

Capital gains, on the other hand, won’t provide cashflow – as you’ll only see the returns when the property is sold. However it does provide the opportunity to build long-term wealth. It’s important to remember that capital gains are never guaranteed.

Rather than prioritising one over the other, it’s best to try and build a diverse property portfolio that covers a mixture of both. Or if you’re only looking to purchase one investment property, have a think about your financial goals, which may help you to decide  whether to focus on high rental yield or take advantage of potential capital gains.

If you’re looking to buy an investment property, it’s important to understand its rental yield. Then consider your financial goals for the purchase, and make sure this is the right property to help you achieve them.

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