When it comes to property investment, yield matters.
In fact, it is one of the two most important factors in determining whether a residential property is a good investment or a poor one. But how exactly does it work? What are the benefits of a high yielding property? And how do Perth’s property yields compare to those in the rest of the country?
What does yield mean?
Yield is simply the annual return you receive on an investment property. Expressed as a percentage, gross yield is determined by dividing the annual rent a property receives by its value.
For example, if you have a property worth $400,000 and you receive $400 a week rent, your gross yield would be calculated this way:
$400 x 52 (total annual rent) = $20,800
Property value = $400,000
Yield = $20,800/$400,000 = 5.2%
To work out a property’s net yield, you need to take out any expenses, such as maintenance, strata levies and property management fees.
Why should investors care about a property’s yield?
Yield is one of the most important measures of how an investment is performing. After all, it indicates what percentage of the property’s value you can expect to receive as rent.
You can use that rent to supplement your income. Alternatively, if you have a mortgage over the property, you can put that income towards your loan principal so that you eventually own it outright.
What is the yield on Perth properties right now?
According to CoreLogic’s latest data, Perth houses currently offer a median gross yield of 4.3%, while apartments offer a median gross yield of 5.3%. This means that, if you owned a Perth apartment worth $500,000 you could expect an annual income from it of $26,500.
Perth’s average yield compares favourably with all other mainland capitals. In fact, only Darwin offers investors a higher return. Sydney houses provide a median gross yield of just 2.7% and apartments provide 3.4%. Houses in Melbourne provide a median gross yield of 2.9% and apartments offer 3.9%.
Which Perth suburbs offer the best yield for property investors?
According to recent REIWA data, some of the best performing Perth suburbs when it in 2019 when it came to yield were:
Osborne Park 6.1%
Rent versus capital growth: which matters more?
Yield isn’t the only way to make money out of an investment property. The other key metric investors look for is capital growth, or the amount a property’s value increases each year.
Generally, capital growth doesn’t go in a straight line but rises quickly when the economy is booming and goes flat or even falls during an economic decline.
With capital growth fairly stable in Perth in recent years, many investors have focussed instead on yields.
Whether you should focus on capital growth or yield depends on why you’re looking to invest in property in the first place. If you’re investing to provide an income – such as in retirement – yield matters a lot more than if you’re looking to accumulate long-term wealth.
That said, most investors will look for a combination of the two – high yield and reasonable growth in value.
What does the future hold for Perth rental yields?
The COVID-19 emergency measures brought in earlier this year will end on 21 March 2021.
Due to these measures, and low stock levels, we are currently experiencing a low vacancy rate of under 1% and expect this to continue into the new year. In turn, this is putting immense pressure on rents in Perth and we expect to see yields increase significantly in 2021.
If you’re looking to invest in Perth property, get in touch.