Whenever one makes a financial decision, whether it is about investing in real estate or any other asset class, an important deciding factor is the return it brings from the investment. The income generated from the investment is known as yield. Yield gives you a correct picture of profit or loss made with respect to your real estate investment. Based on these results, you can make the right judgement about the working of the real estate market. It helps you grow your investments in the sector.
How is rental yield calculated?
There are two types of rental yield — gross rental yield and net rental yield.
In the case of gross rental yield, the income earned from the investment is calculated without deducting the expenses associated with the property, which the owner has to make.
Gross rental yield = Annual rental income/ Property value x 100
For instance, if Ram has bought a property for Rs 80,00,000 for which he gets a monthly rent of Rs 25,000, then the annual rental income is Rs 25,000 x 12 = Rs 3,00,000.
Gross rental yield = 3,00,000/80,00,000 x 100 = 3.75%
On the other hand, you have something known as the net rental yield, calculated after deducing the expenses incurred by the property owner.
Net rental yield = Annual rental income – annual expenses/property value x 100
For instance, if Ram has bought a property for Rs 80,00,000 for which he gets a monthly rent of Rs 25,000, then the annual rental income is Rs 25,000 x 12 = Rs 3,00,000. Ram spends around Rs 30,000 as expenses towards the property annually.
Net rental yield = 3,00,000-30,000/80,00,000 x 100
= 3.375%
What is total return yield?
Also known as return yield, this includes capital gains and is calculated on the basis of the property’s performance in the past.
Return on investment = Current value of the property – Value at which property was purchased/ Value at which property was purchased * 100 * (1/ investment’s holding period)
For example, if the current value of the property = Rs 1,00,00,000, the property was bought for Rs 8,000,000 and holding period of the property is two years, then the return on investment is
1,00,00,000-80,00,000/80,00,000x 100 x (½) = 12.5%
What is the difference between return on investment and yield?
While yield is calculated based on the annual income of the property, the return on investment includes the capital gains.
FAQs
How is yield calculated?
Yield is equal to annual rental income/property value x 100.
What is gross rental yield?
Gross rental yield doesn’t consider the maintenance expenses and calculates the rental yield based on the annual rental income.
What is net rental yield?
Net rental yield takes into consideration the maintenance expenses while calculating the rental yield.
What is the calculation of rental yield based on?
Rental yield’s calculation is based on the annual return from a property investment.
What is the calculation of return on investment based on?
Return on investment also considers capital gains.
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