Enter the annual rental income, annual expenses, and the property value into the calculator to determine the rental yield percentage.
Rental Yield Formula
The following formula is used to calculate the rental yield of a property.
RY% = (I – E) / PV *100
- Where RY% is the rental yield percentage
- I is the annual income generated through rent
- E is the total annual expenses associated with the property
- PV is the property value
Rental Yield Definition
What is a rental yield? A rental yield is defined as the ratio of the annual net profit generated from a property with respect to it’s current or purchase value.
How to calculate rental yield?
- First, determine the property value.
Typically, this is the current fair market value of the property. For this example, the property is found to be worth $400,000.00
- Next, determine the annual income.
On a monthly basis, this property generates $2,500.00 on income. On an annual basis that is equal to $30,000.00.
- Next, determine the annual expenses.
Between repairs, maintenance, and taxes, the annual expenses come out to $6,000.00.
- Finally, calculate the rental yield.
Using the formula above, we find the rental yield to be ($30,000.00-$6,000.00) / $400,000.00 * 100 = 6%.
About Rental Yield
Where are rental yields the highest? Rental yields tend to be highest in areas where the price of homes have been stagnant for some time, or areas with low expenses and taxes for taking care of the home. The highest yields are always gathered by savvy real-estate owners no matter what part of the world.
Does rental yield include expenses? The formula for calculating rental yield does include expenses. This is because to understand the true value of a property, you need to understand the expenses in upkeep for that property. Otherwise, the rental yield would not be a very useful metric.
What is a good rental yield? In 2021, and more specifically the current housing market, rental yields above 6% are considered good. Anything above. 8-10% is considered excellent.
Why is rental yield important? A rental yield is one of the defining metrics in determining whether purchasing a real-estate property for generating rental income is a good deal or not. If you pay a high price for a property, but are not able to charge a high rent, then the rental yield will be low are you will not generate a large profit.