Waterloo Leads Sydney City Yields at 3.7%

Yields across 4 suburbs in Sydney's City and Inner South range from 3.7% in Waterloo down to 1.0% in Potts Point - Woolloomooloo. That spread is wider than the gap between short-term rental and long-term rental at the city level (gross yields of 2.8% and 1.9% respectively), which means WHERE you buy inside this pocket of Sydney matters more than HOW you rent it out. This ranking shows which suburbs lead on gross yield and explains the pattern behind the numbers.

Waterloo Leads at 3.7%, Premium Postcodes Drop to 1.0%

The four suburbs in Sydney's City and Inner South pocket sort cleanly by entry price. Cheaper postcodes deliver substantially higher yields because rents do not fall in lockstep with sale prices.

Gross yields = annual income / sale price. Based on 3-bed house medians. The dashboard shows every property type and bedroom count.

Why Waterloo Leads: Cheap Entry, Strong Tenant Pool

Waterloo tops the ranking at 3.7% for one structural reason: it sits roughly half the price of its neighbours but commands rents that are not half as low. Median entry of $1,561,228 versus $4,542,976 in Potts Point - Woolloomooloo is a price gap of roughly two-thirds, while weekly rent only drops by about a sixth. The yield gap follows the price gap, not the rent gap. Waterloo has been one of Sydney's most actively redeveloped pockets over the last decade, with the Green Square renewal area absorbing thousands of new high-density dwellings; that supply has kept sale prices in check while a young, employment-driven tenant pool feeding into the CBD has held rents up.

Darlinghurst comes in second at 2.3%. The yield is roughly 1.4 percentage points behind Waterloo, but the suburb's character is very different: tight Victorian terraces, restaurant-driven foot traffic, and walking distance to both Hyde Park and Oxford Street. That mix favours short-term rental more than the headline figure suggests, with a short-term gross yield of 3.2% indicating travellers will pay a premium for that location even when the long-term rental cash flow is modest. Inversely, Paddington - Moore Park at 2.3% is more of a long-term rental suburb. Its appeal is family-grade housing stock on quiet leafy streets near Centennial Park, which attracts long-stay professional tenants rather than weekend visitors.

Potts Point - Woolloomooloo sits at the bottom of the table at 1.0%. The price tag of $4,542,976 reflects harbour proximity, conversion-stock heritage apartments, and the lifestyle premium of one of Sydney's most established inner pockets. Buyers there are not buying for cash flow; they are buying for scarcity and capital growth. The data shows it: Potts Point - Woolloomooloo commands the highest entry price in the pocket but the lowest weekly rent of the four, which is the hallmark of a market priced on amenity rather than income.

The Yield-Price Trade-Off: Roughly 3x More Capital at Risk for Less Than Half the Yield

The inverse relationship between price and yield is stark in this pocket of Sydney. An investor entering at $1,561,228 in Waterloo versus $3,404,126 at the city-pocket median is committing roughly half the capital to access a yield nearly double the area average. Premium suburbs yield less because buyers are paying for amenity, scarcity, and expected capital growth rather than income; cheaper suburbs yield more because rent is anchored to what working tenants can afford, not to land values.

This pocket sits well below both the New South Wales median yield of 3.6% and the Australian median of 4.0%. Even Waterloo at 3.7% is below the national average, which tells you that this is fundamentally a premium market: the framing for any buyer here should be long-term appreciation, not immediate cash flow.

The four suburbs ranked above are themselves the in-demand pockets of Sydney's City and Inner South. Investors accept the low headline yields because of capital growth, low vacancy, and resale liquidity. The short-term rental yield rarely closes the gap on its own: NSW caps non-hosted short-term rentals in Greater Sydney at 180 nights per year, which structurally limits the ceiling of any short-term rental strategy in this pocket regardless of nightly rate.

What the Ranking Doesn't Show

A high yield can mean depressed sale prices, not strong rents. Waterloo leads on yield partly because high-density supply has held its sale prices below their fundamentals, not because rents have surged. Capital growth is the other half of the return story, and on that front the premium suburbs have historically outperformed: total return (income plus growth) in Potts Point - Woolloomooloo or Paddington - Moore Park over the last decade has often exceeded what Waterloo delivered, even with the yield gap.

Vacancy risk also varies. The premium suburbs have deeper, more reliable rental pools because their tenant base includes corporate relocations and long-tenure professionals; some higher-yield pockets have thinner pools and more turnover. And the medians shown here are 3-bed house figures: 2-bed apartments in this pocket sell for around $1,474,367, which produces a different yield profile entirely.

View Sydney City and Inner South in the dashboard → Free preview · every bedroom count and property type

Negative Gearing Reshapes the After-Tax Picture

Negative gearing matters more in this pocket than almost anywhere else in Australia because the gross yields are so low. With city-pocket gross yields of 1.9% for long-term rental, almost every leveraged investor here will run a cash-flow loss in the early years: operating costs of around $30,662 consume roughly half of annual rent of $63,337, and adding mortgage interest at typical loan-to-value ratios pushes total holding costs well above rent. Australian tax law allows that loss to be deducted against salary income, which can substantially soften the holding cost.

The benefit scales with the investor's marginal tax rate. At the top bracket of 45% (income above $190,000), every $1 of rental loss saves $0.45 in tax. At 30% ($45,000-$135,000), it saves $0.30. So a $20,000 annual cash-flow loss on a Potts Point - Woolloomooloo property might cost a 45% earner roughly $11,000 after tax, while costing a 30% earner roughly $14,000. Building depreciation allowance (2.5% per year of construction cost for buildings under 40 years old) plus fixtures and fittings depreciation (carpets, appliances, air conditioning) add non-cash deductions on top, amplifying the offset for newer or recently renovated stock.

Short-term rental properties that turn a profit do not benefit from negative gearing because there is no loss to offset. That is why the after-tax comparison between strategies in this pocket can flip the pre-tax picture entirely: a long-term rental property running a modest pre-tax loss may deliver a positive after-tax return for a high-income investor, while a short-term rental property generating modest profit faces full marginal tax with no offset. The 50% capital gains tax discount on properties held longer than 12 months applies to both strategies equally.

Regional Context: This Pocket Trails State and National Yields

The City and Inner South pocket's yield range of 1.0% to 3.7% sits well below both the New South Wales median of 3.6% and the Australian national median of 4.0%. Even the top suburb here trails the national average, which is the diagnostic signature of a premium market: investors are paying for harbour proximity, established infrastructure, and growth expectations rather than current income. Compared with regional NSW or outer-suburban Sydney where 4-5% yields are routine, this pocket only stacks up if the appreciation thesis carries the return.

Verify current state and council rules before investing; this is an active legislative area in Australia. NSW Greater Sydney's 180-night cap on non-hosted short-term rentals is the binding regulatory constraint here, and registration on the NSW Planning Portal is mandatory. Data reflects market conditions as of May 2026.

This information is for educational purposes only and should not be considered financial or legal advice. Regulations and market conditions change frequently. Verify current rules with local authorities before making investment decisions.