How to Compute Rental Yield

Understanding and calculating rental yield is essential for property investors seeking to gauge the profitability of their investments. Rental yield measures the return on an investment property, expressed as a percentage of its value. It helps investors assess how effectively their property is generating rental income compared to its purchase price or current market value.

To compute rental yield, follow these steps:

1. Calculate Gross Rental Income: Begin by determining the total annual rental income the property generates. This can be found by multiplying the monthly rental income by 12. For example, if a property rents for $2,000 per month, the gross annual rental income is $2,000 x 12 = $24,000.

2. Determine the Property Value: Obtain the current market value of the property. This could be based on recent sales of comparable properties or a professional appraisal. Suppose the property’s market value is $400,000.

3. Compute Gross Rental Yield: Use the formula:

   $\text{Gross Rental Yield}=\left(\frac{\text{Gross Annual Rental Income}}{\text{Property Value}}\right)\times 100$Gross Rental Yield=(Property ValueGross Annual Rental Income​)×100

   Applying the values from the example:

   $\text{Gross Rental Yield}=\left(\frac{24,000}{400,000}\right)\times 100=6\%$Gross Rental Yield=(400,00024,000​)×100=6%

   Thus, the property has a gross rental yield of 6%.

4. Calculate Net Rental Yield: To get a more accurate picture, consider the net rental yield, which accounts for expenses such as property management fees, maintenance costs, and insurance. Subtract these expenses from the gross annual rental income to get the net rental income. Then use the formula:

   $\text{Net Rental Yield}=\left(\frac{\text{Net Annual Rental Income}}{\text{Property Value}}\right)\times 100$Net Rental Yield=(Property ValueNet Annual Rental Income​)×100

   For instance, if annual expenses total $4,000, the net rental income is $24,000 - $4,000 = $20,000. Hence:

   $\text{Net Rental Yield}=\left(\frac{20,000}{400,000}\right)\times 100=5\%$Net Rental Yield=(400,00020,000​)×100=5%

   This indicates a net rental yield of 5%, reflecting the property's profitability after accounting for expenses.

5. Consider Capital Growth: Although not part of the yield calculation, understanding the potential for capital growth can help evaluate the overall investment. A property with strong capital growth prospects can offer additional returns beyond rental yield.

By accurately computing rental yield and factoring in all relevant variables, investors can make informed decisions about their property investments and optimize their portfolios for maximum return.