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How to Calculate Net Rental Yields for Properties

How to Calculate Net Rental Yields for Properties

If you live in a cosmopolitan area, the ever-increasing cost of renting a decent space is annoying. This is why many people are desirous of having their own homes. To do this, most of them often go for mortgage loans.

However, beyond owning spaces for personal use, many investors are active in the real estate market in search of a competitive ROI.

They evaluate the property’s location and if found ideal, they give serious consideration to acquiring it for rent or resale. This reminds us of one of the three most important factors in real estate – location, location and location. To know more on the importance of location in the real estate market, you can click here.

Apart from the location, consideration for investment should also be determined by things such as “net rental yields”.

In this article, we will discuss issues revolving around net rental yields and how it influences the decision to buy or backout of a deal in the real estate market.

Let’s get right into it.

What Is Rental Yield?

In the simplest term, it is the ROI (returns on investment) gotten from rents by tenants.

Because acquiring a property is a capital-intensive venture, when done for the purpose of earning from rent, the numbers have to add up. In the long run, if the profit gotten from rent is good (percentage-wise), the acquisition is said to have a good rental yield.

How Is Rental Yield Calculated?

To figure out if a real estate venture is profitable for renting, knowing how to calculate the rental yield is important.

To have a rough estimate, you are to calculate the expected annual earnings from rent. When you figure that out, divide the number by the purchase cost of the property, then multiply the outcome by 100. This will give you a percentage value of the rental yield.

Figuring Out A Property’s Net Rental Yield

You should know that there are other running expenses that should also be taken into account. So, the calculation above will only account for your gross rental yield.

More than this, the exact profitability or the determination of a good rental yield is determined by the net rental yield. This is the profit gotten after every other expense is accounted for. Let us go over some of these expenses.

Maintenance Cost

These are running expenses on things such as electricity tariffs, water supply, waste disposal, among others.

The maintenance cost is one of the unavoidable running expenses that property investors hoping to make money from renting properties will have to contend with.

With regard to the rental yield, the higher the cost of maintenance, the lower it will be. On the contrary, if the maintenance cost is low, the earning from rent will be good.

In places where the cost of maintenance is usually high, property investors often have to increase the rent that tenants pay to be able to stay profitable.

Tax on Property

Compared to maintenance costs, this is easy to figure out. The property tax is one of the periodic running expenditures that have to be deducted to get the gross rental yield.

Cost of Repair

At certain points, there will be damages and malfunctions to certain utilities in the building. Depending on the agreement with the tenants, property investors may be charged with the responsibility of fixing these damages. This can be problems with the HVAC system, sewage system, power supply around the property, among others.

Because of the possibility of having to spend on repairs, you do not want to be caught off your guard when the need arises. So, as a property investor, you are supposed to set aside funds to cater for these eventualities.

The cost of repair is not something that can be easily anticipated and deducted from the gross rental yield beforehand. However, it plays a huge part in determining how profitable the acquisition of a property for rent will be.

Agency Fees

This are the fees paid to your broker so that the property can be marketed to old or new tenants.

Considering their expertise in getting the right kind of tenant, this payment is usually a good investment. However, it is one of the running expenses that should be deducted to arrive at your net rental yield.

To get more information on the subject of rental yield, you can read this article here:

On a Final Note

For property investors aiming to make a reasonable profit from renting their acquired properties, we have in this article looked at a number of things that should be factored in to determine how profitable a real estate investment will be.

While we have provided a general guide above, it will be in your best interest to have real estate investment experts guide you through the process of choosing the right property to invest in. This will save you both the stress of doing all the calculations and the possibility of making the wrong choice.

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If you have any comments, please email the author of this article and click on the link above

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