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What is Rental Yield?

What is rental yield?

If you’ve been considering property investment, chances are you’ve come across the term “rental yield”.  As an investor, it is an important concept to understand, to assess the potential income and cash flow of an investment property.

Rental yield is the rate of income return over the cost associated with an investment property, typically expressed as a percentage. It’s a frequently used matrix in property data, and it’s important to understand how it is calculated and what it indicates.

How to calculate rental yield

There are 2 types of rental yields, gross and net. It is essential to understand the difference and how each of them are calculated.

Gross rental yield

To work out the gross rental yield, you need 2 key figures – the annual rental income and the property value.

  • Annual rental income = weekly rent x 52 “or” monthly rent x 12.
  • Property value = could be purchase or market value, depending on whether you are looking at the current performance, or future prediction.

Once you’ve worked out the 2 figures above, the calculation is relatively simple:

Gross rental yield = (Annual rental income / Property value) x 100

For example, a property that was purchased for ฿3,900,000 and returns a monthly rent of ฿15,000 would have a current rental yield of 4.61%.

However, if the current market value of the property is ฿4,500,000, and the rental income remains the same, then the potential rental yield would be 4.00%.

It’s important to understand that current or historical rental yields are not necessarily accurate indicators of future performance, especially in a heated property market where prices are soaring but rental prices are stalling.

Also, gross rental yield does not consider any expenses associated with keeping the property. So, a property with high rental yield but also high expenses may result in a low net rental income.

Net rental yield

Calculating net rental yield requires a lot more factors – known or estimated – but it’ll also give you a more accurate prediction of rental return.

In addition to the Annual rental income and Property value, you will also need to research and/or estimate all the costs and expenses associated with a property, such as purchasing and transaction costs, ongoing fees and expenses as well as vacancy costs. These include but are not limited to (where applicable):

Property Costs Ongoing Expenses
Property purchase cost / market value Mortgage interest repayments
Loan Costs Repair and maintenance
Building and pest inspections Amphur rates / taxes
Land tax Property management fees
Stamp duty Loss of rent – non-occupied
Legal fees Insurance / Depreciation
Add up all the property costs to get a total property cost figure Add up all the expenses throughout the year to calculate a total annual expenses figure

Once you have all the required figures, you can use this formula to work out the net rental yield:

Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100

Using the property in the previous example, where the purchase cost was ฿3,900,000 and the monthly rent was ฿15,000, if this property’s overall cost of purchase was ฿4,200,000 and the annual expenses are ฿45,000 then its current net rental yield would be 3.21%. This is significantly lower than its gross rental yield of 4.61% and may greatly affect your assessment of its value.

The more factors you can include in the calculation, the more accurate the resulting rental yield figure will be, but it can be difficult to get an accurate estimate of all the associated expenses. There are a myriad of tools and software available in the market for property investors. If you’re after a more accurate depiction of rental yields, cash flow and capital growth etc., you may wish to consider purchasing property investment analysis tools and software.

How important is rental yield?

Rental yield can be helpful in determining the potential value and return of an investment property. However, gross rental yield is not a very accurate indicator as costs and expenses are not factored into the equation; and net rental yield is often based on many assumptions and factors beyond your control, such as vacancy periods, mortgage interest rates and maintenance costs which can be highly volatile and impact the rental return significantly.

So, while it’s important to consider the rental yield, it should be used as an indicator only, together with other key factors such as location, aspect and potential capital gain, in assessing the overall return and value of an investment property. Please also take into consideration the financial institutions current interest rate on deposits and loans. Which is considered the best option for your personal circumstances? If researched well, buying a rental property when interest rates are low may be a good investment. Likewise, if the bank rates are low, consider the possibility of purchasing a parcel of land and home or both for its growth potential providing “it is” within an area regarded as having positive growth. There is an old expression, “They’re not making any more Land”! The moral of this blog is that there are opportunities within the Real Estate market, only you can make the decision that best suits your current situation.

We hope this information assists you in some shape or form. We also remind you to seek professional advice both financially and legally before entering any Real Estate agreements. The information above is an example only and should not be used solely in your decision-making process.

 

Isan Real Estate

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