Why averaging property yields gets it wrong
Ask "what's the average rental yield across my properties?" and the instinctive answer is to add up each property's yield and divide by the number of properties. That calculation treats every property as equally significant, regardless of how much money is actually invested in it — which is rarely true, and never a safe assumption once property values differ by any meaningful amount.
A $350,000 property yielding 7% and a $900,000 property yielding 4% are not equally important to the portfolio's real return. The larger property represents nearly three times the capital, so it should count for close to three times as much in any average that claims to describe the portfolio as a whole.
Portfolio gross yield
The correct calculation weights each property's yield by its share of total portfolio value:
Portfolio Gross Yield = Total Annual Rent ÷ Total Portfolio Value × 100
This is mathematically identical to weighting each property's individual yield by its share of total value and summing the results — but adding total rent and total value first is simpler and less error-prone.
| Metric | City Apartment | Family House | Townhouse | Regional House |
|---|---|---|---|---|
| Property value | $500,000 | $900,000 | $600,000 | $350,000 |
| Weekly rent | $400/week | $750/week | $560/week | $480/week |
| Annual rent | $20,800 | $39,000 | $29,120 | $24,960 |
| Gross yield | 4.16% | 4.33% | 4.85% | 7.13% |
Total annual rent is $113,880 across a total portfolio value of $2,350,000, giving a weighted gross yield of 4.85%. Simply averaging the four individual yields (4.16%, 4.33%, 4.85% and 7.13%) instead gives 5.12% — a portfolio that appears to yield noticeably more than it actually does, purely because Regional House's small size lets its high 7.13% yield pull the naive average up further than its actual capital weight justifies.
Portfolio net yield
Net yield does the same weighting, but on rent net of operating expenses rather than gross rent. See gross vs net rental yield for the single-property version of this distinction.
Portfolio Net Yield = (Total Annual Rent − Total Operating Expenses) ÷ Total Portfolio Value × 100
In the worked example, total annual operating costs across the four properties (excluding loan interest) are $22,880, leaving $91,000 of net rent against $2,350,000 of value — a weighted portfolio net yield of 3.87%, against the 4.85% gross figure above. The gap between gross and net yield is itself worth watching at portfolio level — a widening gap usually means operating costs are growing faster than rent across the portfolio as a whole.
How property size affects economic weight
Weight in a portfolio yield calculation comes entirely from value, not from yield, rent, or how much attention a property gets. Family House, at $900,000 in value, carries roughly 38% of the total weighting in this portfolio's yield calculation — more than double Regional House's 15% weighting — regardless of the fact that Regional House has the far higher individual yield.
- A high-yielding small property can only move the weighted portfolio figure a little, because it doesn't represent much capital.
- A low-yielding large property drags the weighted figure down proportionally more, because it represents most of the capital invested.
- The simple average ignores both of these facts entirely — which is exactly why it produces the wrong number.
Current value vs purchase price
Portfolio yield can be calculated on current value (as above) or on original purchase price — sometimes called yield on cost. Both use the same weighted-average formula; they just divide by a different total.
Yield on Cost = Total Annual Rent ÷ Total Original Purchase Price × 100
Suppose the four worked-example properties were originally purchased for a combined $1,990,000, against their combined current value of $2,350,000. Yield on cost comes out to 5.72% — noticeably higher than the 4.85% yield on current value, because values have risen since purchase.
Yield on current value answers: how efficiently is my capital being used right now, at today's prices? It's the figure relevant to a hold, sell or refinance decision today.
Yield on cost answers: how has this investment performed relative to what I actually paid? It's a track-record figure, not a decision-making one — a property can have an excellent yield on cost while its yield on current value has quietly fallen behind the market.
Portfolio Performance series
Weighted portfolio yield FAQs
- What is the average rental yield of my property portfolio?
- It is not the simple average of each property's individual yield. The correct figure is the weighted average: total annual rent across every property divided by total portfolio value, multiplied by 100. Simply averaging individual yields gives a small property the same influence as a large one, which overstates or understates the true portfolio figure depending on which properties happen to have the highest and lowest yields.
- How do I calculate weighted average portfolio yield?
- Weighted Average Gross Yield = Total Annual Rent (every property added together) ÷ Total Portfolio Value (every property added together) × 100. For net yield, subtract total operating expenses from total annual rent before dividing.
- Why is a simple average of property yields wrong?
- A simple average gives every property equal weight regardless of how much capital sits behind it. In a worked four-property example, the simple average of the individual yields is 5.12%, while the true weighted portfolio yield is 4.85% — the simple average overstates the real figure because a small, high-yielding property is being weighted as heavily as a much larger, lower-yielding one.
- Should portfolio yield be calculated on current value or purchase price?
- Both are valid, but they answer different questions. Yield on current value answers how efficiently your capital is being used right now. Yield on original purchase price (sometimes called yield on cost) answers how the investment has performed relative to what you actually paid. Because property values typically rise over time, yield on cost is usually higher than yield on current value for the same portfolio.
- Does a bigger property always pull portfolio yield down?
- Only if its own yield is below the portfolio average. A large property with an above-average yield pulls the weighted figure up, not down. What matters is the combination of size and yield together — which is exactly what the weighted-average formula captures and a simple average ignores.