Why Gross Rental Yield is One of the Best Capital Growth Indicators

Michael Fuller

September 22, 2020

mins reading time

Are you stuck trying to decide exactly when and where to invest in property? Gross Rental Yield statistics may be your answer.

Don’t worry, you're not alone in trying to pick the best locations from over 15,000 suburbs countrywide. There are countless stories of property buyers finding their property market research overly time consuming and (after fighting off the biased property spruikers) they buy on emotion, only to regret this later as their portfolio stalls on one or two properties and costs them each month in negative gearing.

But there is a different way to pick the best areas for your budget using a proven method that relies on hard facts and very smart data-driven research technology. And it’s free.

It all starts with 8 powerful property market indicators that, together, calculate the gap in supply and demand (and therefore capital growth potential in every suburb) for you so you can get back to spending time with your friends and family knowing your property investment portfolio is working hard for you and not the other way around.

Let’s examine one of these 8 powerful property market indicators… Gross Rental Yield.

(You can read the whole blog series by using the links in the '8 Supply-Demand Indicators' block)

What is Gross Rental Yield?

Gross Rental Yield is the rental income as a percentage of the property’s value. For example, if a tenant paid $600 a week for a year, the annual rental income for the owner would be $600 x 52 = $31,200. Say the property is worth $950,000 then the Gross Rental Yield would be $31,200 / $950,000 x 100 = 3.2%. The Gross Rental Yield is calculated before expenses such as council, management and strata fees are deducted. 

The higher this figure, the more demand there is from renters, and soon investors, as a result… so a high Gross Rental Yield is a precursor to capital growth.

When a suburb becomes popular, tenants will be the first to move there; as it’s easier to get a lease than it is to get a mortgage. The investors wade into the market attracted by higher rental yields… and then owner-occupiers finally get their act together. By this stage, some of the renters may decide to buy in the area. All this buying activity places pressure on property prices pushing them… (you guessed it)... UP! 

Ideally an investor wants to find a location which offers both excellent rental yields and capital growth potential. A high Gross Rental Yield means better returns for investors and this means better cash flow which in turn can mean an investor has the cashflow to purchase more property or to borrow against the mortgage to increase their property portfolio.

Where you can get Gross Rental Yield stats

Collating and comparing this data for 15,000 suburbs is obviously a challenge even for the Excel spreadsheet data scientist in all of us. 

Of course, we have made this easy for you with our free suburb research tool, Boomscore! Check the Gross Rental Yield for 15,000+ suburbs split by units and houses in Boomscore’s Suburb Profiler. Who knows, if all the other indicators support a high Gross Rental Yield figure, then you may be the first to spot a suburb set to Boom.

BOOMSCORE - BIG DATA & ARTIFICIAL INTELLIGENCE (AI)

Big data and AI capability makes it possible for the Boomscore capital growth calculator to crunch the data for each of the 15,000 Australian property markets. A task few could do manually even if they knew how. Boomscore simply means you can now find safer locations where prices are most likely to increase faster. Over the past 10 years, Boomscore’s data algorithms have outperformed the ‘hotspot’ picks of some of the more recognised property market research gurus. In fact my (then) 6 year old daughter showed them how easily it’s done using just a few clicks on Boomscore (read how).

Boomscore rates every suburb (by house or unit) out of 100 based on how they perform across the 8 supply-demand indicators in this series. The higher the Boom Score, the more demand exceeds supply, which greatly increases the probability of property value rises in that location for that property type. Get Boomscore Free.

But be careful with Gross Rental Yield ...

Gross Rental Yield is one of the most unreliable property market research stats out there because the figures needed to calculate Gross Rental Yield are highly susceptible to statistical anomaly, especially where there are such diverse multiple markets (e.g. an old house market and a new and modern house market) in any given suburb. 

For e.g. if there was an old house market and a new and modern house market in the same suburb and in one month mostly new houses (with high rental yields) sold and then the next month mostly old houses in need of care (and only able to attract low rental yields) were the predominant selling stock, then the Gross Rental Yield would fluctuate quite a bit from month to month… and would not necessarily be an indication of capital growth or decline.

Watch out for Suburbs where:

  • there are very few new leases being signed or properties advertised for rent, as you may not estimate typical weekly rent correctly.
  • not many properties have sold (or there are not a lot of properties up for sale) as it could be impossible to reliably gauge the typical value for homes in that area.
  • there are significantly different property types on the market… new, old, large blocks, small blocks, small houses, large houses… you get the drift.
     

In closing ...

Property prices, and therefore capital growth potential, are influenced by a number of factors. If you understand these factors and how to work with the capital growth indicators available to you, then there is no reason why you can't find the best investment locations to suit your strategy.

There are 15,000 suburbs in Australia - that’s 30,000 property markets (if you take into account the Unit and House markets in each suburb). Despite what the macro property market is doing, there are always viable micro markets out there… and it may come down to one particular street in one particular suburb. In order to find these nugget suburbs you need to compare the data for all 15,000 suburbs (and 30,000 markets) against one another to rank order them and let the cream of the crop float to the surface. And to crunch the numbers you need to have a good understanding of the importance of the data and how to work with it to find or track your chosen suburbs.

If any of our blogs on the subject have peaked your interest, you can download our Free Ultimate Guide on How to Find Super Profitable Areas to Invest with Scientific Accuracy using Data Driven Insights, or attend our in-depth (but affordably priced) online property research training course (coming soon ~ register your interest now!).  And we encourage you to use Boomscore, our free tried and tested suburb ranking tool to get you started.

Read next blog ... Proportion of Renters

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Michael Fuller, Creator of Boomscore

Michael Fuller

creator of boomscore & boomscore capital partners (previously hotspotcentral)

Michael initially created Boomscore to quickly determine the capital growth potential of a location including for his own development projects. He's on a mission to help every day Aussies invest without the usual 'expert bias' on where and when to buy real estate or the commission driven incentives obscuring sound advice.

 Michael is an expert contributor to various property investing and property development publications and shares his thoughts freely with his Boomscore subscribers.

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