Are You Getting The Right Rental Yield?
Extreme caution should be the key if you are investing in property to generate an income through renting it out. If due care is not taken, you might end up incurring losses in place of making profits. This is why it is important for landlords to calculate the rental yield of the property.
What is rental yield?
Rental yield is defined as the rate or the percentage of returns from the rental income of an investment property. It can be better explained as the rate of returns from an investment. Real estate brokers and sellers often calculate the yield before they put the property on sale in the market.
How rental yield is calculated
There are two ways to look at rental yield: gross rental yield and net rental yield.
Gross rental yield is the annual rental income from the property value, which does not include the charges you pay towards the maintenance of this property or the amount that you pay in taxes. It simply is the money you earn as rent yearly.
Gross yield = (annual rental income/ property value) x 100
Annual rental income = monthly rent x 12
Property value = purchase value of the property
Suppose, you bought a property for Rs 20 lakh and have been earning an annual rental income of Rs 1.20 lakh. The gross rental yield, in this case, would be six per cent.
As gross yield doesn't factor in the expenses associated with the upkeep of a property, high gross yield does not necessarily mean good rental income. High maintenance costs might bring down the profit substantially.
For calculating the net rental yield, first of all, research about all type of cost which is associated with the property. This can be transaction costs, taxes, ongoing fees, expenses, maintenance cost etc.
Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100
You can arrive at the net rental yield after deducting the annual expenses from the annual rental income.
Again, for a property of Rs 20 lakh, where the annual rental income is Rs 1.20 lakh and the annual expenses are Rs 12,000, the net rental yield would be 5.4 per cent.
Why rental yield is important for home buyers
Rental Yield is important for home buyers to understand how good the property can be if they want to earn a healthy income from their investment. Rental yield is often compared with interest rate offered by other investment channels such as stocks, mutual funds, fixed deposits and gold. Home buyers need to take in the net rental yield into consideration as it is more practical and realistic as compared to gross yield.