Whether you’re a seasoned property investor, or you’re just getting started on the property investment journey, then you’ve probably heard the term ‘rental yield’. Read on to discover what rental yield is and how to calculate it.
Understanding the rental yield of a property helps you assess the income and cash flow potential of that particular property.
Rental yield is a measure of the income that a property generates each year as a percentage of the property’s value. Since the formula can be applied to all properties that generate an income, it can be used to compare investment opportunities.
It’s important to remember that capital growth isn’t considered in the rental yield calculation.
There are two numbers you need to be able to calculate rental yield:
Once you have these two numbers, you can plug them into the following formula:
Gross Rental Yield = Annual rent / property value x 100
Let’s work through an example.
Assume you have a property valued at $500,000 that is currently rented at $500 per week. We have already calculated above that the annual rent in this scenario is $26,000 so all we need to do is plug the value into the formula. Therefore:
Gross Rental Yield = $26,000 / $500,000 x 100
Gross Rental Yield = 5.2%
This means that the property generates income equal to 5.2% of the property’s value.
Nope, gross rental yield doesn’t take into account the expenses of the property. This means that if a property has a high rental yield but also has high expenses then it’s net rental yield may not be the same as a comparable property that has lower expenses.
I will run you through how to calculate Net Rental Yield in another article.
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