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Property Type: Likewise, the property type is also a critical factor to accurately interpret the rental yield.The rental yield on properties located in high-demand, low-supply markets would exceed that of a low-demand, high-supply market, i.e. Location: The standard rental yield can vary across a wide range based on the location.Similar to most standardized metrics, what constitutes a “good” rental yield is subjective and is based on the circumstances around comparable properties.Ĭomparable properties must be located near the target property, with a virtually identical risk/return profile, which is predicated on the property type and characteristics. The latter reflects the current fair value of the property, whereas the former is the fixed property purchase price on the date of initial purchase.īut while there is a mismatch in the timing of the metric if the purchase cost were to be used, the metric can still provide some useful insights on the property investment. Net Rental Yield (%) = (Annual Rental Income – Operating Expenses) ÷ Property Cost The formula to calculate the net rental yield – the more practical measure of profitability in the real estate market – is as follows. The rental yield formula compares a property’s rental income to its property value. The trade-off, however, is that the metric requires more detailed financial data points (and estimates) to calculate. The net rental yield, compared to the gross rental yield, offers a more accurate measure of a property’s true profitability. Net Rental Yield → In contrast, the net rental yield is virtually identical to the gross rental yield, except for accounting for the property expenses incurred as part of running the day-to-day operations.While more convenient and less time-consuming to calculate, the gross rental yield is more of a quick and dirty method to estimate a property’s potential profitability rather than to provide a comprehensive picture of the property’s profit potential on a more granular level. Gross Rental Yield → The gross rental yield is the rental income of a property relative to its property value, without consideration toward operating expenses such as property management fees, repairs or vacancies.There are two different types of rental yield metrics: 1) the gross rental yield and 2) the net rental yield. Net Rental Yield: What is the Difference? Percentage Form Conversion → Convert the resulting figure into a percentage by multiplying by 100.Annual Rental Income ÷ Operating Expenses → Divide the property’s annual rental income by the sum of all operating expenses.Operating Expenses → Calculate the sum of all fees and expenses incurred from operating the property.Annual Rental Income → Calculate the annual rental income of the property from all tenants.The rental yield of a property – calculated post-operating expenses – can be broken into the following steps:
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Property Value → The property value refers to the current market value of the property, i.e.Operating Costs → The total costs incurred by the property owner as part of operating the property, which includes costs such as property management fees and repair costs.Rental Income → The rental income is the profits generated by a property per year that belong to the owner from renting out the property (or units) to tenants.
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To calculate a property’s rental yield, a real estate investor needs three inputs: In the real estate market, one of the factors used to measure the profitability of a property investment is the rental yield metric.
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