Cheaper vs Dearer Rental Property: Start With Gross Yield

A landlord asked me this week whether he should buy the $500,000 rental returning $400 a week, or stretch to a $600,000–$650,000 place in the same suburb that might rent for $500–$600. Same land, same bedrooms, same postcode. My first move isn't to tour either one. I sit down with the gross yield.

Start with gross yield

Gross yield is the annual rent divided by the purchase price, before any expenses. For the cheaper place, $400 a week is $20,800 a year. Divide that by $500,000 and you get 4.16%. The dearer place has a rent range, so I work both ends. At $550 a week, that's $28,600 a year. On a $625,000 purchase price, the yield is 4.58%. If it only rents for $500 a week, the yield drops to 4.0%. The dearer property isn't automatically better. Its yield is only slightly higher at the top of the range and worse at the bottom.

The interest cost tells the same story. A bigger loan on the dearer place adds more interest each week than the extra rent brings in. If you borrow 80% of both, the loan on the $625,000 place is $100,000 larger. At a typical investment loan rate, that extra $100,000 costs about $120 a week in interest. The extra rent at $550 versus $400 is $150 a week. The gap is thin. If the dearer place only gets $500, the extra rent is $100 a week, which doesn't even cover the extra interest. That's before rates, insurance, maintenance, and vacancy.

The price gap lives in the house, not the land

People assume the dearer property is worth more because the land is better. In the same suburb with similar land size, that's rarely the case. Land values within one suburb don't vary much unless one block has a corner position, two street frontages, development upside, or a wider block. Most of the price gap between a $500,000 house and a $625,000 house on similar land is the building itself, the street, or the presentation. Newer kitchen, second bathroom, nicer street, better orientation. None of those reliably produce higher rent in proportion to the higher price. Tenants pay for usable space and condition, not for the seller's renovation spend. A $60,000 kitchen renovation might add $30 a week rent. The yield on that extra spend is terrible.

That's why I never compare list prices without looking at what each place actually is. A quick drive past both tells me more than the asking price. I look at the roof, the paint, the fencing, the yard. Those are the things a tenant sees on the way in.

Get a written rent appraisal

Before I make an offer, I get a written rental appraisal from the property manager who would actually manage it. Not the selling agent. The selling agent's job is to get the highest sale price. A property manager's written appraisal is based on comparable rentals that have actually leased in the last few weeks, not asking prices. In my old office, I'd pull the last six comparable leases within a kilometre, same number of bedrooms, same condition band, and write the number. If the manager says the dearer place is worth $520 not $550, the whole deal changes. Get that in writing. If the manager won't put it in writing, I walk.

Check the lease and the building

If the property is tenanted, the lease end date is the first thing I ask for. A tenant on a fixed term lease generally can't be moved out early in most Australian states, but I always check the local rules before relying on that. If the lease has eleven months to run and the rent is $400 a week, that's your income locked in. Check the rent payment history from the agent's rent trust account (where they hold tenants' rent before paying you). Any arrears pattern changes the numbers. A tenant who pays a week late every month costs you cash flow. Also check whether the current rent is below market. The cheaper property at $400 a week might be under-rented by $40 or $50, which improves its real yield. The dearer property might be at market already with no upside.

Building and pest inspections on both properties are non-negotiable. A $15,000 restumping or a $20,000 roof replacement on the dearer house wipes out years of the extra yield. I've seen buyers skip the pest inspection on a cheaper place and inherit termite damage that cost more than the price difference. Do the inspections before you commit.

Which one I'd buy

If both places pass inspection and the written appraisal confirms the numbers, I'd take the cheaper one. The yield is only slightly lower, the loan is smaller, and the cash buffer is bigger. The dearer property only beats it if the rent lands at $550 every single week and the building needs nothing for five years. That's two assumptions too many for a first-time landlord.