The Royal Prince Edward Yacht Club was formed in 1922 by a group of gentlemen who wanted a yacht club on the waterfront on the southern side of the harbour. At that time, the Royal Sydney Yacht Squadron and Sydney Amateur Sailing Club were in their present locations on the north shore, and the Royal Prince Alfred Yacht Club was in the city. Sir Alexander McCormick was the first Commodore of the Club, and early meetings were held in the dining room of the Muston family home, which still stands and remains in the ownership of members of the Muston family, on the shores of Felix Bay.

The site on which the clubhouse stands was acquired, and the hat taken round the early members to fund the construction of the clubhouse in 1923-1924. It was purpose built as a clubhouse, and is not a converted residence as commonly supposed. Since it was originally built, the only changes to the external fabric of the building have been the extension of the kitchen, and the addition of a new ladies room with the balcony between them at the rear of the building. This work was completed in 1992 and the portico over the front door added a short time later.

Originally named the Southern Yacht Club, the name Prince Edward Yacht Club was adopted with the approval of HRH Edward the Prince of Wales who succeeded his father, King George V, but abdicated shortly thereafter. The Club also adopted, with approval, the Prince of Wales feathers as its crest. It was granted the warrant to include the prefix "Royal" in its name in 1935.

In the clubhouse is proudly displayed the racing flag of the Royal Yacht Britannia, which bears the Prince of Wales feathers, and represents a tangible link to the Club's formation.