If you’re in the market to purchase rental property, you need to have a way to assess the potential return on investment in order to make an informed purchase decision. That’s where Gross Rental Yield comes enters the equation.
Gross Rental Yield for rental property is calculated as a percentage. This percentage result allows real estate investors to understand how a prospective rental property’s annual rental income relates to it’s purchase price and/or it’s value.
If you want to compare the potential income from a piece of rental property you have your eyes on, use Gross Rental Yield to estimate how much income you can expect from your purchase.
Because it doesn’t factor in expenses like taxes, maintenance, and accounting, Gross Rental Yield isn’t the only metric you’ll base your purchase decision on. However it’s still an important tool in your decision process.
Here is the formula:
- Take the Annual Rental Income of a property
- Divide the Annual Rental Income by the Property Value or Purchase Price
- Multiply your answer by 100%
Gross Rental Yield=(Annual Rental Income/Property Value or Purchase Price)×100%
Formula Parameters:
Annual Rental Income: This is the amount of rental income the property produces in a one year period.
Property Value or Purchase Price: This is the total purchase price with all the associated fees and expenses required to purchase the property.
Example:
Say you’re interested in a property that generates $2,000 in monthly rental income. That comes out to $24,000 a year. If you decided to purchase the rental property it would cost you $300,000. This cost is the price of the property, closing costs, and any other expenses required to conclude the sale of the property.
The Formula:
- You take the $24,000 income
- Divide that $24,000 by the $300,000 purchase price
- You get 0.08
- Multiply 0.08 times 100%
- Your answer is 8%
Gross Rental Yield=($24,000/$300,000)×100%=8%
This means that the property's annual rental income is 8% of its total value.
But What Is a Good Gross Rental Yield?
The higher the yield, the better return on your investment. Higher Gross Rental Yield means your rental property is producing more income in relation to it’s costs. When I say costs, I’m only referring to the costs of acquisition and not operating expenses. You have other Formulas for that. A good rental property investment strategy analyzes a target property from multiple angles with Gross Rental Yield being one of them.
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