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What is rental yield?
Rental yield is a critical metric that every property investor should understand. It's a measure of how much income an investor can expect to earn from a rental property. Essentially, rental yield is the annual rental income expressed as a percentage of the property's value.
Rental yield is a crucial metric because it helps investors determine the return on their investment. The higher the rental yield, the more income an investor can expect to earn from a property. Investors can use rental yield to compare different properties and assess their potential returns.
How to calculate rental yield
To calculate rental yield, investors need to determine two key figures: the property's value and the annual rental income. The formula for rental yield is simple:
Rental yield = (Annual rental income / Property value) x 100%
For example, if a property is worth $500,000 and generates $30,000 in annual rental income, the rental yield would be calculated as follows:
Rental yield = ($30,000 / $500,000) x 100% = 6%
This means that the property has a rental yield of 6%.
Gross rental yield
There are two main types of rental yield: gross rental yield and net rental yield.
Gross rental yield is the rental income generated by a property expressed as a percentage of its value. Gross rental yield does not take into account any expenses associated with owning and operating the property. Gross rental yield is calculated using the formula we previously discussed:
Gross rental yield = (Annual rental income / Property value) x 100%
For example, if a property is worth $500,000 and generates $30,000 in annual rental income, the gross rental yield would be calculated as follows:
Gross rental yield = ($30,000 / $500,000) x 100% = 6%
Net rental yield
Net rental yield takes into account the expenses associated with owning and operating the property. Expenses can include property management fees, maintenance costs, insurance, property taxes, and mortgage payments. Net rental yield is calculated using the following formula:
Net rental yield = ((Annual rental income - Annual expenses) / Property value) x 100%
For example, if a property is worth $500,000 and generates $30,000 in annual rental income, but the annual expenses associated with owning and operating the property are $10,000, the net rental yield would be calculated as follows:
Net rental yield = (($30,000 - $10,000) / $500,000) x 100% = 4%
This means that the property has a net rental yield of 4%.
Net rental yield is a more accurate measure of a property's return on investment because it takes into account the expenses associated with owning and operating the property. Investors should aim for a high net rental yield to maximize their returns.
Rental yield vs capital growth
Rental yield is also an essential metric for assessing the potential for capital growth. Capital growth is the increase in the value of a property over time. A property with high rental yield can provide a steady stream of income while also increasing in value over time. Investors should aim to invest in properties with high rental yield potential and strong potential for capital growth.
How does property type affect rental yield?
Investors should also be aware that rental yield can vary depending on the location of the property. Properties in high-demand areas with a shortage of rental properties may have higher rental yields than properties in low-demand areas. Investors should also consider the age and condition of the property. Older properties may have lower rental yields due to higher maintenance costs, while newer properties may have higher rental yields due to lower maintenance costs.
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