What is Rental Yield

Rental yield is a measure of the income generated from a rental property relative to its value and is one of the important measures in calculating the ROI from real estate investments.

What is Rental Yield

Rental yield is a financial metric that evaluates the income generated from a rental property in relation to its market value. It provides investors with a clear understanding of the property's profitability and is a crucial factor in real estate investment decisions.

Key Components

Annual Rental Income: This is the total income received from renting the property over a year, typically before any expenses are deducted. This figure includes regular rent payments from tenants but may also encompass other income sources, such as parking fees or service charges.

Property Value: This refers to the market value or purchase price of the property. It can be based on an appraised value or the price at which the property was acquired. For more accurate yield calculations, the current market value is often preferred.

Formula

It is typically expressed as a percentage and calculated using the following formula:

The basic formula for calculating rental yield is:

Rental Yield = (Annual Rental Income) / Property Value × 100

Example Calculation

If a property generates ₹ 2,40,000 in annual rent and has a market value of ₹ 1,00,00,000, the calculation would be:

Rental Yield = (₹ 2,40,000) / (₹ 1,0000,000) × 100 = 2.4%

Types of Rental Yield

Gross Rental Yield: This is calculated using the total annual rental income without accounting for expenses. It provides a broad overview of potential income.

Net Rental Yield: This more accurate measure takes into account the operating expenses associated with the property, such as maintenance costs, property management fees, insurance, and property taxes. The formula is:

Net Rental Yield = (Annual Rental Income − Annual Expenses) / Property Value × 100

Example Calculation (Net Rental Yield)

Annual Rental Income: ₹2,40,000

Annual Expenses: ₹90,000 (for tax on rent, maintenance, property tax, missed occupancy etc.)

Property Value: ₹ 1,00,00,000

First, calculate the net rental income:

Net Rental Income = Annual Rental Income −Annual Expenses

Net Rental Income = ₹2,40,000 − ₹ 90,000 = ₹ 1,30,000

Now, calculate the net rental yield:

Net Rental Yield = ₹ 1,30,000 / ₹ 1,00,00,000 = 1.3%

Summary

Net Rental Yield is what makes sense for an investor of real estate. This net rental yield clubbed with capital gains of the property (post tax and other adjustments on sale of property) provides for the actual ROI on the real estate.

Regards

Manoj Arora

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