What is rental yield?

I have two flats given on rent; hence, I can help you understand what is the rental yield. Rental yield is the annual rental value received from rental properties. It helps you comprehend how profitable a property is likely to be as a rental investment.

What Does Rental Yield Mean?

Rental yield is a metric used by real estate investors, to calculate the potential return on investment from a rental property. Here are some major aspects of it:

• It determines the annual income generated from renting out a property relative to its value.

• Investors use it to evaluate the attractiveness of a property investment by comparing the rental income to the property's cost or market value.

• A higher rental yield suggests greater potential for returns, while a lower yield may indicate lower profitability or higher property costs.

This is the simple meaning of rental yield. 

What is a Good Rental Yield?

Investors aim for a rental yield of 5.5% or above. This rate somewhat ensures stability in rental income. But in India, on average, the rental yield is generally around 3 per cent in various cities. 

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What is the Rental Yield for Commercial Property?

I bought a property 3 years ago and put it up on rent. I knew that I had to pay taxes on it, hence I called up my CA friend to understand how to do it and how can I include all of that in my ITR. I must say, my mind was blown with the amount of information he had shared. He also explained about rental yield and it’s importance in the real estate market. Anyway, since you have asked particularly about rental yield. I am going to stick to it and let you know what it is and two methods that we can calculate rental yield. Let’s go!

Yield here means earnings. So rental yield is the earning you get from renting your property. Rental yield is calculated annually as return on investment from a commercial or residential property.

There are two ways to calculate rental yield - gross and net rental yield. The main difference lies in the fact of inclusion and exclusion of expenses towards maintenance of the property and taxes paid. Here is how the calculation goes:

Gross Rental Yield = (Annual Rental Income/ Property Value) x 100

This one is pretty simple, I am going to show you an example:

Suppose I have a property which gives me a return in form of monthly rent of Rs. 15000 and property value stands at Rs. 35 lakhs, therefore the gross rental yield will be:

Gross Rental Yield = ((15000 x 12)/3500000) x 100

Gross rental yield = (180000/3500000) x 100

Gross rental yield = 5.14%

Keep in mind while calculating net rental yield you will have to include the expenses paid towards maintenance, property taxes, etc. The formula to calculate net rental yield is:

Net Rental Yield = [(Annual Rental Income- Annual Expenses)/ Property Value] x 100

Here is an example to explain things better:

The annual expenses on my property were Rs. 50000 and the rest remains the same as the example above.

Net Rental Yield= [(180000 – 50000) / 3500000] x 100 = 3.71%

I hope this explains what does rental yield mean and how to calculate it.