The two definitions
Gross yield is a year's rent divided by the price. Nothing comes out. It's quick, it's easy to compare, and it flatters every property equally.
Net yield is a year's rent minus the running costs of owning the property, divided by the price. It tells you what the house actually earns before you think about the loan.
Neither number includes the loan. Interest is a cost of how you fund the purchase, not of the property itself, so we keep it separate. Two buyers can own the same house with very different loans, and the net yield is the same for both of them. What the loan does to your weekly cashflow is a different question, covered in what a property really costs to hold each week.
One house, worked through
Here's the example we use across this site. It's illustrative, not a forecast, and the costs are assumptions you should replace with real quotes for any property you're considering.
- Price: $650,000
- Rent: $560 a week, or $29,120 a year (52 weeks)
- Gross yield: $29,120 ÷ $650,000 = 4.48%
Now the running costs. These are the lines that turn 4.48% into something smaller.
| Running cost (a year) | Amount | How we got it |
|---|---|---|
| Vacancy allowance | $1,120 | Two weeks without a tenant, at $560 |
| Management and letting fees | $1,960 | 7% of the $28,000 rent actually collected |
| Council and water rates | $2,800 | Typical for a suburban house; check the council |
| Landlord insurance | $1,900 | Building plus landlord cover; get a quote |
| Repairs and maintenance | $2,000 | An allowance, not a guess at one big job |
| Total | $9,780 | About 34% of the full year's rent |
Rent left after running costs: $29,120 − $9,780 = $19,340 a year.
Net yield: $19,340 ÷ $650,000 = 2.975%, which rounds to about 2.98%.
That's the whole gap: 1.5 percentage points, almost all of it from ordinary costs nobody puts in the advertisement.
Why each line matters
Vacancy. Even a well-located house sits empty between tenants. Two weeks a year is a reasonable allowance in a tight rental market. In a softer one it can be longer, and a long vacancy in a single year can wipe out a large share of that year's net income.
Management and letting fees. Most investors use a property manager. The fee is usually a percentage of rent collected, plus letting fees when a new tenant moves in. We've rolled both into one 7% figure here for simplicity. Ask any manager for their full fee schedule, including inspection, advertising and tribunal fees.
Council and water. These vary a lot between councils and between states. Water usage can often be passed to the tenant where the property meets the state's rules (water-efficient fittings and a separate meter, for example). Fixed service charges usually stay with the owner.
Insurance. Landlord insurance is not the same as home and contents. It covers things like loss of rent and tenant damage, within limits. Premiums rise sharply in flood and bushfire areas, which is one reason we look hard at hazard data at the pocket level.
Repairs and maintenance. Established houses need hot water systems, fences, gutters and paint. An annual allowance smooths that out. Some years you'll spend nothing; some years you'll spend three times the allowance.
What's missing. This example has no land tax and no strata. A house in Victoria, or a larger portfolio in any state, can add land tax: see land tax: when it starts to bite. A unit or townhouse would add strata levies, which can move net yield a long way. Holdwell buys freestanding houses, so strata is usually nil, but it's worth knowing why a unit's high gross yield often isn't what it seems.
A quick rule of thumb: on a typical suburban house, running costs take around a quarter to a third of the rent. If a property's net yield looks close to its gross yield, a cost line is probably missing.
How we use yield
Yield is one of our five suburb vetoes. For most briefs we won't recommend a suburb where typical gross yields sit below about 2.5%, because the holding cost gets too heavy to carry for long enough. We use gross yield at the suburb level because it's comparable across thousands of suburbs. Once we're looking at a specific house, we work in net figures, with real numbers for rates and insurance.
Yield is also only half the story. A town with one major employer can show a high yield right up until that employer leaves. A lower-yielding house in a suburb with deep, diverse demand may cost more to hold each week and still be the better asset. How we weigh those trade-offs is covered in how to choose a suburb and a pocket.
Run your own numbers
The yield calculator in our calculators lets you change the price, the rent and the running costs and see gross and net yield side by side. Plug in council rates and an insurance quote for the actual property rather than our defaults. If you're buying through a trust or company, or the rental is part of a wider plan, your accountant and a licensed financial adviser are the right people to check how it fits.
General information only. Nothing on this site takes into account your objectives, financial situation or needs, and it is not financial, credit, tax or legal advice. Past performance is not a reliable guide to future performance.