Q. How to Calculate Rental Yield?
There are two forms of rental yield: gross rental yield and net rental yield. Gross rental yield is a simpler metric that doesn’t take the property’s expenses into account, while net rental yield does. Net rental yield is usually a better metric to look at because expenses don’t always scale linearly with income, meaning that as you earn one dollar in income, the expenses associated with that income are not always the same for different properties.
Q. What is Gross Rental Yield?
Gross rental yield is simply the annual rental income of the property divided by the value of the property. [ Gross Rental Yield = Annual Rent / Property Value ].
Q. What is Net Rental Yield?
Now on to the slightly more complicated rental yield formula. The premise is the same as gross rental yield, but this time we will subtract out expenses in order to get a truer metric for comparison. The expenses can include taxes, insurance, repairs, vacancy costs, or really anything that it takes to maintain the property. One thing to note is that here, debt expenses, like mortgage repayments and interest, are not usually included as expenses since they are related to the investor’s finances and not related to the property; however, you may include them as expenses if you feel it gives a better way to compare potential investments.
Q. Formula for Net Rental Yield?
Net Rental Yield = [(Annual Rent * ( 1 - Vacancy Rent )) / Annual Expenses ] / Property Value.
