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What Is Rental Yield? Easy Rental Yield Calculator & Guide

https://rentprep.com/collecting-rent/rental-yield/



Owning rental property isn’t all it takes to grow your rental business. Analyzing your properties, markets, and plans is also essential to long-term success. Rental yield is one of the best calculations landlords use to calculate how much they make from their properties.


What is it about rental yield that is so powerful?

The rental yield calculation is helpful at many stages of the rental process. From choosing rental investment properties to effectively improving underperforming units, this number can guide your next steps. Without a guide, you may be pouring money into the wrong parts of your business and wondering why your bottom line isn’t improving.


Don’t move forward without guidance any longer. Learn how to calculate rental yield today with my simple guide and formula. You’ll be ready to put it into action immediately.


A Table Of Contents On Rental Yield

Rental yield may be just one calculation, but that calculation brings together multiple pieces of data that are key to your success as a rental business owner. Follow along with this rental yield guide to learn more:

  • What Is Rental Yield?

  • Gross vs. Net Rental Yield

  • Rental Yield vs. ROI

  • Why Is Rental Yield An Important Calculation For Landlords?

  • #1: Confirm Income Potential

  • #2: Identify Loss

  • #3: Improve Your Properties

  • Rental Yield Calculator: Create Your Formulas

  • Gross Rental Yield

  • Net Rental Yield

  • Beyond Rental Yield

  • Avoid Vacancies With Better Tenant Screening

  • Rental Yield FAQs

  • What is the formula for rental yield?

  • What determines a good rental yield?

  • What other formulas are useful for landlords?

  • How do I know if my rental property is profitable?

  • Rental Yield: More Than “Good” Or “Bad”

What Is Rental Yield?


Essentially, rental yield is a percentage that represents how much money you will likely make on a rental property. By comparing the rental income with the property’s cost or value, you can determine what type of profits the rental will generate.

This percentage is one way to measure the investment property’s return. Whether you’re a new landlord or working on honing your large investment portfolio, rental yield is useful for understanding what is and is not profitable.


Gross Vs. Net Rental Yield

There are two types of rental yield used by landlords and investors: gross rental yield and net rental yield. While similar, these two calculations use slightly different data and serve varying purposes.

Gross rental yield looks at potential return. It does not take into account expenses or operating costs; it simply considers rental income against the property’s value.

Net rental yield, also known as the cap rate, incorporates these missing expenses into the picture. Landlords use this when they need a more specific, accurate view of the real-time rental yield of any given property. Expenses added to this calculation may include management fees, mortgage fees, maintenance costs, insurance, and more.

The majority of properties will see a net yield around 2% lower than their gross yield. When investigating new investment opportunities, you can use this information to predict a property’s true profit stream.


Rental Yield Vs. ROI

If you weren’t previously familiar with rental yield, you might be thinking it seems a lot like return on investment (ROI). And it’s true–both of these evaluations focus on profitability and return.

The most significant difference between these two calculations is the time period utilized in the formula. Return on investment is a retrospective term that looks at the appreciation actually earned during a certain period and how it compares to the actual money invested.

Meanwhile, rental yield looks to the future. It doesn’t consider capital gains or other changing factors and instead assumes consistent rent will come in to develop a specific yield. Both calculations are valid, but they serve different purposes for landlords.


Why Is Rental Yield An Important Calculation For Landlords?

There are several reasons why it’s a good idea to add rental yield to your management portfolio.


#1: Confirm Income Potential

Using rental yield can help you make decisions about potential investment properties. Data available about properties can help you estimate their earning potential through rental yield. This allows an understanding of whether or not the property would be profitable for your investment plans.


#2: Identify Loss

Looking at current rent rates compared to property value regularly is a great way to stay on top of your investment profitability. Not all properties will remain profitable over time, and it’s important to consider if it might be time to unload a property. Using rental yield to look towards the next year is an excellent way to refine your business plans.


#3: Improve Your Properties

If your investment properties have a low rental yield, it’s time to make changes. Rental yield lets you know that something isn’t working; it’s up to you to figure out what to do to improve the return you get from your investment.

Common ways to improve yield include:

  • Improving the property to justify higher rent

  • Ensuring you choose high-quality tenants for lower turnover rates and repair costs

  • Installing efficient, high-quality appliances for lower operating costs

  • Streamlining management and contract processes to save money

The exact solution to your yield problem will, of course, be specific to your business, but these can be great points to start with if you are unsure what issues exist.


Rental Yield Calculator: Create Your Formulas

As I touched on earlier, there are two main types of rental yield, and they are both useful in their own right. It’s time to learn how to calculate these two types of rental yield: gross and net.


Calculating Gross Rental Yield

The formula for gross rental yield is simple:

  • Gross rental yield = (annual rental income / property price) x 100

This calculation will give you a percentage that represents the gross rental yield. The property price should include all closing costs. You can also use current property value as an alternative to see the rise or fall of a property’s rental yield according to the changing market.


Calculating Net Rental Yield

Net rental yield’s formula adds in an essential part of business planning: your expenses.

  • Net rental yield = (Annual rental income – operating expenses) / property value x 100.

Operating expenses should include management fees, maintenance costs, utilities, and any other required expenses to maintain the rental.


Beyond Rental Yield


Rental yield is a valuable piece of data for analyzing your business and identifying pain points. However, it is not the final solution to any problems. Rather, rental yield should be utilized for the perspective it provides.

If the rental yield on your properties is lower than expected, consider what may be contributing to this. For example, low rental income will reduce your overall yield percentage. Your rental income could be low due to limited demand in your market, a lack of renovations, or high turnover rates.

Take rental yield as an indicator of what’s going well and what could be improved.