What is Rental Yield?
The Rental Yield is a real estate metric that compares the rental income generated by a property to its fair market value, expressed as a percentage.
Table of Contents
- How to Calculate Rental Yield?
- Gross Rental Yield vs. Net Rental Yield: What is the Difference?
- Rental Yield Formula
- Net Rental Yield Calculation Example
- What is a Good Rental Yield?
- What Factors Determine Rental Yield?
- Rental Yield Calculator
- 1. Gross Rental Yield Calculation Example
- 2. Net Rental Yield Calculation Example
How to Calculate Rental Yield?
In the real estate market, one of the factors used to measure the profitability of a property investment is the rental yield metric.
To calculate a property’s rental yield, a real estate investor needs three inputs:
- 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.
- 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.
- Property Value → The property value refers to the current market value of the property, i.e. the fair value as of the present date.
The rental yield of a property – calculated post-operating expenses – can be broken into the following steps:
- Annual Rental Income → Calculate the annual rental income of the property from all tenants
- Operating Expenses → Calculate the sum of all fees and expenses incurred from operating the property
- Annual Rental Income ÷ Operating Expenses → Divide the property’s annual rental income by the sum of all operating expenses
- Percentage Form Conversion → Convert the resulting figure into a percentage by multiplying by 100
Gross Rental Yield vs. Net Rental Yield: What is the Difference?
There are two different types of rental yield metrics: 1) the gross rental yield and 2) the net rental yield.
- 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. 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.
- 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. The net rental yield, compared to the gross rental yield, offers a more accurate measure of a property’s true profitability. The trade-off, however, is that the metric requires more detailed financial data points (and estimates) to calculate.
Rental Yield Formula
The rental yield formula compares a property’s rental income to its property value.
The formula to calculate the net rental yield – the more practical measure of profitability in the real estate market – is as follows.
Rental income must be expressed on an annual basis, whereas the property value is the property’s current market value.
The rental yield is expressed as a percentage for investors to better understand the income to expect relative to their property investment, including the real property’s profitability relative to comparable properties.
Like most real estate metrics, the rental yield cannot be used as a standalone measure to guide financial decisions.
However, the underlying pricing that drives the rental income, as well as factors such as location, vacancy rates and trends, are all taken into account by the rental yield.