Gross vs net yield, and why net is what matters

Listings and sales agents quote gross yield because it is simple and flattering: a year's rent divided by the price. But you don't receive a year's rent, and you pay plenty of costs before any of it is yours. Net yield is the number that tells you what the property actually earns.

The two formulas

Gross yield = annual rent ÷ purchase price

Net yield = (rent actually collected − property costs) ÷ total cost of buying

Two differences matter: net yield subtracts costs and lost rent, and it divides by what you really paid, including stamp duty and other buying costs.

A worked example

An illustrative property: $650,000 purchase price, rented at $600 a week. Buying costs (stamp duty, legal fees, inspections) total $27,000.

Gross yield: $600 × 52 = $31,200 a year. $31,200 ÷ $650,000 = 4.8%.

Now the net version.

Net yield on total cost: $19,890 ÷ ($650,000 + $27,000) = 2.9%.

Costs and vacancy have taken about 40% of the gross rent. That gap is typical, and for apartments with strata levies, or properties that attract land tax, it can be larger.

What it means for cash flow

Net yield is calculated before interest. Add a loan to see what you'd actually experience each week.

With an 80% loan of $520,000 at an illustrative 6.0% interest-only rate, interest is about $31,200 a year. Against net income of $19,890, the property costs you about $11,300 a year before tax, or roughly $217 a week.

This is what "negatively geared" means in practice: the property runs at a loss each year, and the investment only works if capital growth, rising rents and any tax effects outweigh that loss over time. Whether that trade-off suits you is a personal decision, but you should make it with the net figure, not the gross one.

Costs people forget

• Strata levies on apartments and townhouses, often several thousand dollars a year, plus special levies for major works.
• Land tax, charged by each state once your total landholdings pass its threshold. It's easy to miss on a second property.
• Vacancy and letting costs, which arrive together when a tenant leaves.
• Big-ticket repairs: hot water systems, roofs and appliances. Budgeting a fixed percentage of rent each year smooths them out.
• Your own time if you manage the property yourself.

How to use this when comparing properties

1. Ignore the quoted yield and rebuild the net figure yourself, using real rates notices, strata reports and insurance quotes.
2. Compare properties on net yield on total cost, so stamp duty and buying costs are counted.
3. Then add finance to see the weekly cash-flow cost, and check you can carry it comfortably if the property is vacant for a month or rates rise.

You can run your own figures in the yield calculator, or get the full spreadsheet version, which adds finance and weekly cash flow, using the form below.