Rental yield and cash flow are two of the most important metrics for property investors, yet they're often misunderstood by beginners. Understanding these concepts will help you determine whether a property will make or cost you money each week, and how to compare different investment opportunities. This guide will teach you how to calculate and interpret these crucial numbers.
What Is Rental Yield?
Rental yield is the annual rental income expressed as a percentage of the property's value. It tells you how much income your property generates relative to what you paid for it - essentially, your return on investment from rent alone.
Simple Rental Yield Example
You buy a property for $500,000 and rent it for $400 per week:
- Annual rent: $400 × 52 weeks = $20,800
- Rental yield: ($20,800 ÷ $500,000) × 100 = 4.16%
This property has a rental yield of 4.16%
Gross vs Net Rental Yield
There are two types of rental yield calculations you need to understand:
Gross Rental Yield
This is the basic calculation using only rental income and purchase price:
Formula: (Annual Rent ÷ Purchase Price) × 100
Gross yield is useful for quick comparisons but doesn't tell the whole story because it ignores all the costs of owning an investment property.
Net Rental Yield
This more accurate calculation deducts all property expenses from the rental income:
Formula: (Annual Rent - Annual Expenses) ÷ Purchase Price × 100
Net yield gives you a realistic picture of your actual return after all costs.
Gross vs Net Yield Comparison
Property Details:
- Purchase price: $600,000
- Weekly rent: $450 ($23,400 annually)
Gross Yield: ($23,400 ÷ $600,000) × 100 = 3.9%
Annual Expenses:
- Council rates: $2,200
- Insurance: $1,200
- Property management: $1,400 (6%)
- Maintenance: $2,000
- Strata fees: $3,200
Total expenses: $10,000
Net Yield: (($23,400 - $10,000) ÷ $600,000) × 100 = 2.23%
The net yield is significantly lower than the gross yield!
What Is Cash Flow?
Cash flow is the actual money left in your pocket (or out of your pocket) each week after all income and expenses. Unlike yield, which is a percentage, cash flow is a dollar amount that directly impacts your weekly budget.
Cash flow can be:
- Positive: Property puts money in your pocket each week
- Neutral: Property breaks even
- Negative: You need to contribute money each week
Cash Flow Formula
Weekly Cash Flow = Weekly Rent - Weekly Expenses
Weekly expenses include:
- Loan repayments (principal and interest)
- Council rates
- Insurance
- Property management fees
- Maintenance and repairs
- Strata fees (if applicable)
Cash Flow Calculation Example
Property Details:
- Purchase price: $500,000
- Deposit: $100,000 (20%)
- Loan amount: $400,000
- Interest rate: 6.5%
- Weekly rent: $380
Weekly Income:
- Rent: $380
Weekly Expenses:
- Loan repayment: $395 (P&I)
- Council rates: $35 ($1,800 ÷ 52)
- Insurance: $20 ($1,040 ÷ 52)
- Property management: $23 (6% of rent)
- Maintenance/repairs: $20 ($1,000 ÷ 52)
Total weekly expenses: $493
Weekly Cash Flow: $380 - $493 = -$113
This property has negative cash flow of $113 per week
Positive vs Negative Gearing
The terms "positive gearing" and "negative gearing" refer to whether your investment property makes or loses money each year:
Negative Gearing
When your property expenses exceed your rental income, you have a negatively geared property. This means you're contributing money from your own pocket to cover the shortfall.
Benefits of negative gearing:
- Tax deductions - losses can reduce your taxable income
- May allow you to afford more expensive properties
- Focus on capital growth rather than income
Drawbacks of negative gearing:
- Ongoing cash contributions required
- Reliance on capital growth to make money
- Higher financial risk if you lose your job
Positive Gearing
When your rental income exceeds all property expenses, you have a positively geared property. This puts money in your pocket each week.
Benefits of positive gearing:
- Immediate cash flow to improve your lifestyle
- Less financial stress and risk
- Easier to service additional loans for more properties
Drawbacks of positive gearing:
- Higher tax liability on rental income
- May sacrifice some capital growth potential
- Often requires buying in cheaper areas
The Australian Context
In Australia, most investment properties are negatively geared due to high property prices relative to rents. This is partly why negative gearing tax benefits exist - to encourage property investment despite poor cash flow returns.
What Makes a Good Rental Yield?
Rental yields vary significantly across Australia based on location, property type, and market conditions:
Typical Australian Rental Yields (2025)
- Sydney: 2.5-4.0% (houses), 3.5-5.0% (units)
- Melbourne: 3.0-4.5% (houses), 4.0-5.5% (units)
- Brisbane: 4.0-5.5% (houses), 5.0-6.5% (units)
- Perth: 3.5-5.0% (houses), 4.5-6.0% (units)
- Adelaide: 4.0-5.5% (houses), 5.0-6.5% (units)
- Regional areas: 5.0-8.0%+ (varies widely)
High Yield Warning
Properties with yields above 7-8% often come with higher risks such as vacancy issues, declining property values, or high maintenance costs. Always investigate why the yield is high before investing.
Factors That Affect Rental Yield and Cash Flow
Several factors can impact your property's financial performance:
Market Factors
- Interest rates: Higher rates increase loan costs and reduce cash flow
- Rental demand: High demand areas have better yields and less vacancy
- Property values: Rising values reduce yield percentages
- Economic conditions: Affect both rents and property values
Property-Specific Factors
- Location: Inner city vs outer suburbs vs regional
- Property type: Houses vs units vs townhouses
- Age and condition: Newer properties often have lower maintenance
- Features: Parking, outdoor space, modern fixtures
Management Factors
- Property management: Good managers reduce vacancy and maintenance costs
- Tenant quality: Good tenants pay on time and look after the property
- Maintenance approach: Preventive maintenance reduces long-term costs
How to Improve Your Property's Returns
There are several strategies to increase yield and improve cash flow:
Increase Rental Income
- Regular rent reviews in line with market rates
- Add value through renovations (kitchen, bathroom, flooring)
- Provide additional features (air conditioning, dishwasher)
- Consider short-term rentals if appropriate
Reduce Expenses
- Shop around for better insurance rates annually
- Consider self-managing to save property management fees
- Budget for preventive maintenance to avoid costly repairs
- Review and appeal council rates if overvalued
Optimise Your Loan
- Regularly review interest rates and refinance if beneficial
- Consider interest-only payments to improve cash flow
- Use offset accounts to reduce interest payments
Analysing Investment Opportunities
When comparing potential investments, consider both yield and cash flow alongside other factors:
Investment Comparison Example
Property A (Inner Brisbane Unit):
- Price: $450,000
- Rent: $420/week ($21,840/year)
- Gross yield: 4.85%
- Net yield: 2.8% (after $9,000 expenses)
- Weekly cash flow: -$65
Property B (Outer Brisbane House):
- Price: $520,000
- Rent: $480/week ($24,960/year)
- Gross yield: 4.8%
- Net yield: 3.2% (after $8,000 expenses)
- Weekly cash flow: -$45
Property B has similar gross yield but better net yield and cash flow due to lower ongoing costs (no strata fees).
Beyond the Numbers: Other Considerations
While yield and cash flow are important, don't forget these factors:
- Capital growth potential: Will the property increase in value?
- Rental demand: How quickly can you find tenants?
- Vacancy rates: How often will the property be empty?
- Tenant quality: What type of tenants does the area attract?
- Your financial situation: Can you afford negative cash flow?
- Tax implications: How will this affect your tax situation?
Important Disclaimer
This article provides general information only and is not financial advice. Property investment carries significant risks, and past performance doesn't guarantee future results. Always consult with qualified professionals before making investment decisions.
Using Tools to Calculate Returns
Manual calculations can be time-consuming and error-prone. Using a property investment calculator can help you:
- Compare multiple properties quickly
- Model different scenarios (interest rates, rent increases)
- Account for all costs including tax implications
- Understand the long-term financial impact
Calculate Your Returns
Ready to analyse potential investments? Use our Investment Property Calculator to calculate rental yields, cash flow, and total returns for any property you're considering.
Common Mistakes to Avoid
When calculating and interpreting yield and cash flow, avoid these common errors:
- Using gross yield only: Always calculate net yield for accurate comparisons
- Forgetting vacancy periods: Budget for 2-4 weeks vacancy per year
- Underestimating maintenance: Old properties can have high repair costs
- Ignoring capital gains tax: This affects your total return when you sell
- Assuming rents will always increase: Rents can stagnate or fall in some markets
- Not factoring in interest rate rises: Your cash flow can deteriorate quickly