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Rental
Property Investment Analysis
Calculating Your Gross and Net Rental Yield
No
rental property investment analysis is ever complete without
calculating rental yield. Why makes it so important and
what exactly is the difference between gross rental yield and
net
rental yield? Uncover the answers to these questions and more in our
Guide to Rental Property Investment Analysis.
What
is Rental Yield and Why it is Important to You as an Investor?
If you look
at advertisements by real
estate agents and rental property
sellers, you will often see them posting the rental yields of their
property. So what exactly is this rental yield that they are talking
about?
Rental
yield is the annual rental returns from a property when it
comes to rental
property investment analysis.
Calculating rental yield is a quick way to compare the returns
from
different rental properties.
All things being equal, a property with a higher rental yield
will be better investment choice because it will give you more returns
for your money. Naturally there are a lot more things to consider when
buying rental property but calculating rental yield
can
give you a quick idea of whether the property deserves a closer
look.
Calculate
GROSS
Rental Yield - If You Need a Quick and Easy Estimate
When most people talk about the rental yield of a property, they are
actually referring to the gross
rental yield. When you are referring to rental yields, it's a good
habit to include the word "gross" because there are actually 2 types of
rental yields.
The formula
for calculating rental yield is given below:
Gross
Rental Yield = (Annual Rent Collected / Total Property Cost) x 100%
Total Property Cost
- This includes the purchase price, closing fees, stamp duty and
renovation costs.
As you can see, rental yield is expressed as a percentage. Depending on
where you live, it's common for properties to have a
gross yield
of 3 to 8%.
Calculate NET
Rental Yield - If You Require More Accurate Yield Figures
For your rental
property investment analysis, you are highly recommended to use the net
rental yield instead. Net yield figures tend
to be more
accurate because they account for the operating expenses of the rental
property as well.
The formula
for calculating rental yield is given below:
Net Rental Yield = [
(Annual Rent
- Annual Expenses) / Total Property Cost] x 100%
Annual
Expenses - Total rental property expenses for 1 year. This
includes repair costs, property taxes, landlord insurance, vacancy
costs, agent fees and hiring costs.
Total Property Cost
- This includes the purchase price, closing fees, stamp duty and
renovation costs.
An
Example on How to Calculate Both Rental Yields for Your Property
To
help you better understand our rental property investment
analysis, let's plug some numbers into the rental yield formulas. Take
a look at our example on calculating rental yield below:
Let's say you bought a single family rental home for $100,000 and you
spent $20,000 on renovations before renting it out. You collect a rent
of $500 from your tenants every month.
In a year, you pay $350 for
repair bills, $450 for rental property
taxes and $200 for landlord insurance.
How much will be your gross and net rental
yield for this rental property?
Firstly we will need to calculate the total property cost by adding up
all the buying costs including purchase
price, closing fees, stamp duty and
renovation costs:
Total Property Cost = 100,000 + 20,000
= $120,000
Annual Rent = 500 x 12
= $6,000
Gross
Rental
Yield = (6,000 / 120,000) x 100%
=
5%
Annual Expenses = 350 + 450 + 200
= $1,000
Net
Rental
Yield = [ (6,000 - 1,000) / 120,000] x 100%
= 4.17%
As you can see from this example, the net yield of a rental property
will always be lower than its gross yield so it tends to be a
safer and more accurate measure.
Want to learn MORE practical
must-know facts on rental property accounting?
Return
from Rental Property Investment Analysis page to our Accounting for Leases
guide
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