Please share with family and friends who have a mortgage.
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn

Every property investor worth their weight in salt has a tried and trusty spreadsheet for calculating rental yields. But, chances are the one you are using doesn’t calculate four different yields, and doesn’t look as pretty as this one. So if you want the best rental yield calculator use ours – it is part of our digital toolkit. The link will open up the calculator in a google doc, prompt you to sign in to your account, and automatically make a copy for you right in your drive so you can use it every morning. Read on to learn about Gross YieldNet YieldCash Yield and Mortgage Coverage

Download the mortgagehq rental yield calculator here.
Note this is a google spreadsheet you will need to have a google/gmail account. The link will prompt you to log in and it will duplicate the spreadsheet so you have your own copy.

What is yield?

Yield is a way of expressing your investments return as a percentage. For property investors, it is typically annualised income as a percentage of purchase price. We like to use four different yield calculations and combine them with capital growth to get a total return figure.

What is Gross Yield?

It is the percentage return from your property investment without including costs. You calculate it by dividing the annual income (we have assumed a 2% vacancy rate) by your purchase price. For example

Annual Income: $28,028

Purchase price: $420,000

$28,028 / $420,000 = 6.8% gross yield

Annual rent / purchase price = gross yield

What is Net Yield

It is calculated after ownership costs but before mortgage costs. So instead of your gross income, you subtract operating costs to calculate your net income and use this to calculate net yield. For example

Purchase price: $420,000

Annual Income: $28,028

less expenses

Insurance: $1,200

Management: $1,962

Rates: $1,442

Maintenaince: $2,000

= Net income: $21,424

$21,424 / $420,000 = 5.1% Net Yield

Net income / purchase price = net yield

What is Cash Yield?

It is calculated by using cash flows, so you divide rental cash profit (income – expenses including mortgage payments), by cash deposit paid. This calculates your cash return. Useful for comparing to other investments, for example putting that cash in the bank, or into shares. For our example, we use a 30-year principal + interest mortgage, at an interest rate of 4%. 

Purchase price: $420,000

Deposit: $126,000 (30%)

Annual Income: $28,028

less expenses

Mortgage: $17,150

Insurance: $1,200

Management: $1,962

Rates: $1,442

Maintenaince: $2,000

= Cashflow: $4,274

$4,274 / $126,000 = 3.4% Cash Yield

Cashflow / deposit = cash yield

What is Mortgage Coverage?

It is an iRefi in-house term (coined by Blandon), which is used to understand how mortgage interest rate fluctuations will affect your portfolio. It is calculated by taking your annual rental and dividing it by your mortgage amount. This gives you a percentage value – if mortgage interest rates are under this amount your property investment rental income covers your mortgage interest.

Purchase price: $420,000

Deposit: $126,000

Mortgage: $294,000

Annual Income: $28,028

$28,028 / $294,000 = 0.095 then 0.095 * 100 = 9.5% mortgage coverage

Annual rental / total mortgage = mortgage coverage

Adding Capital Return to Yield Calculations

Capital Growth is typically presented as an annual percentage of house value increase in a specific area. For you to compare one investment to another you can combine your net yield analysis with your capital growth expectations to calculate a total return. Net Yield + Capital Growth = Total Return. This total return number lets you compare investments in high cash but low capital growth areas with low cash but high capital growth areas (for example block of flats in Manurewa vs duplex units in Remuera.

Capital growth 5%

Net yield 5.1%

5% + 5.1% = 10.1% total return

capital growth + net yield = total return

When Investing in Property how do I use the rental yield calculations to inform my decisions?

Comparing investment properties with yields:

To compare one investment property with another we suggest using total return. This encompasses your capital growth and income.

Cashflow calculations/ affordability:

To check you can afford your property and what effect it will have on your cash flow – use the cash yield

Minimum net yield as a property investment buying rule:

A lot of property investors will have a property investment rule that they don’t purchase a property with a net yield of less than a fixed yield, for example, 6%. It is prudent to use financial rules to guide your decision-making process – as investing is a financial exercise as opposed to an emotional one.  Whereas buying a new home for your family is largely an emotional decision, and secondarily you need to factor in if you can afford it.

Like this article?

Share on facebook
Share on Facebook
Share on email
Email
Share on linkedin
Share on Linkedin
Share on twitter
Share on Twitter

Read more

Aaron Tunstall’s Take.

Aaron Tunstall is the managing director of multiple award-winning Impression Real Estate, which specialises in property management and sales and manages over 1500 properties Auckland

Read More »

BNZ support options

BNZ has launched its home loan support service. They are handling queries via an application form on their website. Excerpt from BNZ website. Updated 1

Read More »

Westpac support options

Westpac has launched its home loan support service. They are handling queries via a ‘application form’ on their website, or via 0800 606 606 BUT

Read More »

Kiwibank support options

Kiwibank has launched its home loan support service. They are handling queries for people who have been financially impacted by Covid-19 via an ‘online application

Read More »

ANZ support options

ANZ has launched its home loan support service. They are handling queries via a ‘call back form’ on their website. Excerpt from ANZ’s website. Updated

Read More »