Rental income is the money you receive from leasing the property to a tenant.
If the rental income covers the expenses of holding the property (such as your loan repayments, maintenance costs and property management fees etc), the property is classified as positively geared, meaning you end up with extra money in your back pocket each week. This money is essentially an extra source of income and can be used for discretionary spending, to pay bills or help pay down debt on your family home.
If the rental income doesn’t cover all your holdings costs, you’ll have to chip in some of your own money to meet these payments – this is called a negatively geared property.
If the property is negatively geared, it’s particularly important to determine what impact extra mortgage repayments would have on your finances in the scenario that your interest rates rise.
A good way to evaluate if a property has a strong rental income is to determine its rental yield, which is a calculation of the value of the property and the annual rental income.
By determining the rental yield of a property, you can measure it against other properties at a suburb or city level to gauge how it compares. In a nutshell, rental yield is a better ‘apples-to-apples’ comparison for rental returns.