Rental yield: Meaning, calculation

A property investment has two metrics on which its growth depends- cap rate that means the return on the property investment and the rental yield.

When you invest in a property not for personal use but for income generation, you always assess one important aspect – the rental yield. What is the meaning of this real estate jargon often used by property consultants, agents, developers and buyers? Well, we at Housing.com have you covered with the meaning and all other necessary details that you should know. Read along!

What is rental yield? 

Rental yield can be defined as a percentage of the total value of a property that you get in a year if you rent it. It is useful in calculating the return of investment (RoI) of a property. The rental yield is directly proportional to the demand for the property. Thus, higher the rental yield, higher will be the demand for property and higher will be the income generation.

See also: How to calculate your rental affordability?

Factors on which rental yield depends

Location: The property’s location plays an important role in determining the rental yield. If a property is in a prime location, it will have a high rental yield. The rental yield will be higher if the property will be in demand. For instance, properties near educational institutions, commercial centres etc. often enjoy a higher rental yield. This is one of the reasons why Pune and Bangalore rental realty market surge.

Property type: The type of property has an impact on the rental yield. Post the pandemic, industry experts point that there has been an increased demand for properties that are self sufficient – such as properties in gated communities with an array of amenities.

Condition of the property: If the property is well-maintained with all amenities, it will command a high rental yield as compared to other properties.

Demand for rental properties: If an area witnesses high demand for rented properties, the rental yield is likely to be high.

Government policies:  Many state government rules such as  Maharashtra’s Rent Control Act and Delhi’s Rent Control Act put a cap on what a landlord can charge the tenant, thus impacting the rental yield.  Also, tax incentives under  Section 80GG of the Income Tax Act gives a deduction of rent that is paid for self-occupied property.

Rental yield calculation

There are two ways for calculating the rental yield.

Net rental yield

While calculating the net rental yield you include expenses such as maintenance cost and taxes paid for the property that year.

Net rental yield = [(annual rental income – annual expenses)/ property value] x 100

If the monthly rental income is Rs 30,000, then annual rental income is Rs 30,000 x 12 = Rs 3, 60, 000.

Property value = Rs 50, 00,000

Annual expenses = Rs 40,000

Then, net rental yield = (3, 60, 000 – 50,000)/50, 00,000 x 100 = 6.2%

Gross rental yield

This is calculated by annual rental income divided by property value; the answer is multiplied by 100.

Gross rental yield = (annual rental income/ property value) x 100, where the annual rental income is equal to monthly rental income x 12.

For example: If the monthly rental income is Rs 30,000, then the annual rental income is Rs 30,000 x 12 = Rs 3, 60, 000.

Property value = Rs 50, 00,000

Gross rental yield is (3, 60,000/50, 00,000) x 100 = 7.2%

However, calculation of gross rental yield doesn’t consider expenses, such as maintenance cost or taxes, etc. Hence, even if the gross rental yield may show a high percentage, the rental value need not be lucrative.

Rental yield enjoyed by different types of properties

• Independent homes: These enjoy higher rental yield as they offer large space and privacy. However, the downside is these have to be maintained properly and requires a lot of landlord attention.
• Apartments: These have low operating costs and are preferred by tenants.
• Multi-unit buildings: These allow landlords to rent out many units in the same building. However, these are difficult for a landlord to manage and they are equally difficult to sell.
• Townhouses: These are like independent homes but two units share the same wall.
• Vacation homes: When these are not used by the owner, they can be rented out. They are known to provide strong rentals.

FAQs