Are you considering investing in a rental property and wondering how to calculate the potential yield return? In this article, we’ll go over the basics of calculating the yield return for a rental property so you can make informed investment decisions.
What is Yield Return?
Yield return is a measure of the financial performance of an investment in real estate. It is calculated by dividing the net rental income of a property by the property’s value or market price. The result is expressed as a percentage, which represents the rate of return on the investment.
How to Calculate the Net Yield Return for a Rental Property
Calculating the yield return for a rental property is relatively straightforward. Here’s the formula:
Yield return = (Net rental income / Property value) x 100
Net rental income is calculated by subtracting all operating expenses, such as property taxes, insurance, and maintenance costs, from the gross rental income. Property value refers to the market value or price of the property.
For example, let’s say you are considering buying a rental property for $200,000 and the gross rental income is $24,000 per year. The property taxes are $2,000 per year, the insurance is $1,000 per year, and the maintenance costs are $1,000 per year. The net rental income for the property would be:
Net rental income = Gross rental income – Operating expenses = $24, 000 – $2,000 – $1,000 – $1,000 = $20,000
Using the formula above, we can calculate the yield return for the property:
Net Yield return = ($20,000 / $200,000) x 100 = 10%
Factors That Affect the Yield Return for a Rental Property
There are several factors that can affect the yield return for a rental property, including:
- Rental rate: The higher the rental rate, the higher the net rental income and the higher the yield return.
- Occupancy rate: The higher the occupancy rate, the more likely the property will generate a consistent stream of rental income, which can increase the yield return.
- Operating expenses: Lower operating expenses can increase the net rental income and the yield return.
- Property value: The higher the property value, the lower the yield return.
- Location: Properties in areas with high demand, such as popular vacation destinations or areas with strong job markets, tend to have higher values and lower yield returns.
Tips for Maximizing the Yield Return for a Rental Property
Here are a few tips for maximizing the yield return for a rental property:
- Set a competitive rental rate: It’s important to research the rental rates in the area to ensure you’re setting a competitive rate that will attract tenants and generate a good return on your investment.
- Keep the property well-maintained: Properly maintaining and managing your property can help increase its value and generate higher rental income. This includes keeping the property in good condition, finding reliable tenants, and keeping up with necessary repairs and maintenance.
- Invest in high-demand areas: As mentioned above, properties in areas with high demand tend to have higher values and lower yield returns. However, the higher demand may also result in higher rental rates, which can offset the lower yield return.
- Consider property management: If you don’t have the time or expertise to manage the property yourself, you may want to consider hiring a property management company to handle the day-to-day tasks. This can help maximize the rental income and yield return, but be sure to factor in the property management fees when calculating the net rental income.
Conclusion
Calculating the net yield return for a rental property is an important step in evaluating the potential financial performance of a real estate investment. By using the formula outlined above and considering factors such as rental rate, occupancy rate, operating expenses, property value, and location, you can make informed decisions about your investments and maximize the yield return for your rental property.