What is yield and how can it determine my decision to invest?
If you're considering investing in the property market, yield is a key term to know.
Prospective landlords use yield as an indicator to establish the investment potential of a property. Those seasoned in the real estate game use yield as a guide to determine whether or not a home is a contender for their shortlist when on the hunt for a new investment.
Of course, there are other aspects that inform the value of a property investment, including land banking, the potential for future infrastructure connection, a seascape, or even those thinking of their future retirement location.
Yield calculations tend to be annually based, and expressed as a percentage of the asset's market value.
A yield percentage provides an approximate indication of that asset's rental income, compared with the value of the property. This figure is calculated as gross yield, before any associated expenses are allocated.
For many, when embarking on the journey of property investment, snagging a dwelling that has multiple cash positives is the dream scenario.
High yield is one of the most sought-after attributes, as well as the potential for significant capital growth, a solid rental return, and low ongoing out-of-pocket expenses.
The challenge for new investors is to snap up this type of property before another savvy buyer does, because this sort of investment does not linger on the market.
Typically, apartments tend to offer better yields than houses. In Canberra, this has long been the case. There has been only one period when rental yield of houses surpassed units, even then the difference was a marginal 0.01 per cent during the September quarter of 2005.
Currently, Canberra's house and unit rental yields are on opposite sides of the spectrum. The widening gap between the two property types is 1.46 per cent, the second highest difference on record.
House gross rental yields hit rock bottom in the June and September 2017 quarters, tightening to produce the lowest on record at 4.31 per cent. The yields have dropped from the peak of 5.03 per cent achieved during the December quarter of 2012.
Investors in search of a house with higher rental return could find better prospects in other Australian cities. As of the September quarter of 2017, Hobart houses ranked highest, with a yield potential of 5.29 per cent.
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Those in search of a unit could opt for Canberra, given that the bush capital provided the highest yielding unit market compared to other Australian capital cities at 5.77 per cent, according to data from the September 2017 quarter. Canberra's unit yields notched the fifth highest on record, closing in on the March 2005 peak at 5.92 per cent and a vast improvement from the 4.74 per cent low in September 2005.
Investing in property can require a substantial injection of cash, from ongoing expenses to unforseen maintenance costs.
Gross yield provides an easy comparative between different value assets and rental incomes.
If net yield is considered, for some, the difference will be a deal-breaker. The net yield allows investment expenses to be factored into the calculation. The output is expressed as a percentage of the property's value, compared to the income-producing element of the investment, after the deduction of expenses.
Rookie investors should not underestimate expenses. They range from transactional fees (stamp duty and legal), vacancy costs (advertising and periods of no rental income), maintenance, management charges, insurances, strata fees and rates.