Why rental yields matter for investors
Thinking of an investment property? There are suburbs where rent returns can outpace mortgage interest rates.
Like the sound of a 9% rental yield? How about 13%? For investors keen on pocketing healthy rent returns at a time of high interest rates, it pays to know where to look.
Price growth tends to hog the headlines. But rental income can go a long way towards helping investors manage the ongoing costs of a property including repayments on an investment home loan.
And it turns out that some neighbourhoods are punching above their weight for exceptional rental yields.
What is rental yield?
Rental ‘yield’ is measured as the annual rent on a property divided by its market value, expressed as a percentage.
For instance, if an apartment rents for $500 a week, it will generate $26,000 in annual rent. If the unit is valued at $600,000, the ‘gross’ (before costs) rental yield will be 4.3%.
Individual investors may find their ‘net’ (after costs) yield varies from official figures. That’s because net yield takes into account all the costs associated with a particular property – ranging from strata levies on an apartment to land tax on a house.
That said, the beauty of knowing a property’s gross rental yield is that it lets you compare the rent returns on different properties, different locations and various types of properties.
Where rental yields can top 9%
Properties that notch up high rental yields can be attractive to investors who rely on their rental as a source of personal income. The rent these dwellings generate can go a long way to paying for key property expenses such as mortgage interest.
When it comes to looking at high-yield suburbs, it makes sense to have some context. As a guide, the median gross rental yield for apartments and units nationally is 4.5% according to CoreLogic, while the median gross rental yield for houses is 3.5% 1 .
The thing is, you could earn more – a lot more in fact, depending on where you buy as noted below.
Data from PropTrack, the research arm of listing portal realestate.com.au, shows that across our capital cities, Moulden – an outer suburb of Darwin, tops the leaderboard for yields on houses, returning a healthy 7%.
If you’re hungry for higher yields, apartments in Melbourne’s Caulfield East are recording yields of 10%. In Orelia, a southern suburb of Perth, units are dishing up yields in the order of 9.2%.
Top 5 suburbs for rental yield - capital cities
For truly supersized yields, it can pay to look at regional locations.
Topping yields for houses in regional locations is Kambalda East, located 630 kilometres east of Perth, where investors can earn gross rental yields of 12.2%.
Western Australia also takes out the title for highest gross rental yields on regional apartments. Investors in Peggs Creek (1,527 kilometres north of Perth) can earn a yield of 13.9%, or 13.8% in South Hedland (1,1616 kilometres north east of Perth).
Top 5 suburbs for rental yield – regional markets
The catch of high rental yields
Of course, not everyone wants to invest in a location that’s a day’s drive from a major city.
But the catch of high yields isn’t just about the tyranny of distance.
According to PropTrack, suburbs in Darwin have historically had higher yields relative to other capitals because a larger proportion of households rent their home, meaning there is higher demand for rentals 4 .
The same logic applies to many mining regions, where the population may be transient. This explains why many of the regional locations with the highest yields are heavily dependent on mining and resource activity.
What matters is that you choose the investment property and location, that meets your personal strategy – whether that is a healthy rental yield or strong capital growth. And for many investors, capital growth is where the action is.
Over time, capital growth can be worth a lot more than higher annual rents. Moreover, some investors actually prefer properties with low rental yields as this can boost the benefits of negative gearing, allowing the investor to enjoy tax benefits.
The bottom line
The main point is that rental yields vary widely – not just within the same city, but even within the same suburb. So, it is definitely something for investors to consider as rent can be a valuable source of income to help manage property costs.
Bear in mind too, there can be a sizeable difference between gross and net yields depending on the property you select. This can make it worth looking into the ongoing costs, which may include strata levies (for units and townhouses), land tax, council rates, insurance and likely repairs and maintenance expenses. On the plus side, many of these cost may be tax deductible.
However, as a long term investor, it is worth looking at the capital growth prospects of a location because in many cases, this is where the big gains can be found over time.
To start your property journey, take a look at the investment home loans offered by Community First. Our competitive rates and interest-only options can help you enjoy success as a property investor.
Sources:
1 https://www.corelogic.com.au/__data/assets/pdf_file/0017/23651/CoreLogic-HVI-Aug-2024-FINAL.pdf
2 https://www.realestate.com.au/news/property-investing-hotspots-the-suburbs-where-investors-are-getting-the-best-returns/#yield
3 https://www.realestate.com.au/news/property-investing-hotspots-the-suburbs-where-investors-are-getting-the-best-returns/#yield
4 https://www.proptrack.com.au/insights-hub/the-capital-city-suburbs-with-the-highest-investment-yields/
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