Rental yield is one of the easiest numbers to compare when evaluating an investment property. It is useful, but it can also give an incomplete picture.
Consider two properties producing similar monthly rent. If one costs substantially more to acquire, has higher maintenance expenses or faces significantly more future competition, the investment proposition is not the same.
Start with the entry price. Paying too much initially can be difficult to overcome, even if the property attracts tenants.
Then consider who is likely to rent the property. Proximity to employment centres, transport, schools and amenities can influence tenant demand, but different locations and unit types appeal to different tenant profiles.
Holding costs also matter. Financing, maintenance fees, property tax, repairs and periods of vacancy reduce the income actually retained by the owner.
Future supply deserves attention as well. A large number of competing units entering the rental market can affect both occupancy and rental rates.
Finally, think about the exit. The property will eventually need another buyer.
Our View
A strong investment should not depend on one attractive number.
Look at entry price, sustainable rental demand, total holding costs, future competition and eventual resale demand together.
Rental yield tells you something about today's income. It does not tell you the whole investment story.