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Calculating rental yield
Gross rental yield is calculated by using the formula (rental income weekly x 52) / property value) x 100. The property value can be either market value or purchase price.
For example, if the purchase price was $500,000, weekly rent was $400 then the gross rental yield will be (400 x 52) / 500,000 x 100 = 4.16%
Gross rental yield formula is used to measure the total rental income received expressed as a percentage of the property's purchase price or market value. It is most commonly due to simple calculations as well as letting you compare properties with different values and rental returns easily.
So why is gross rental yield important? And what do people use gross rental yield for?
Gross rental yield is just one figure but yet it is very useful in understanding a property quickly. When you are out there and you are researching the market and looking at a lot of properties or maybe you are evaluating your portfolio, gross rental yield is a great figure to get an overview of how the rental income of your property compares to the value of your property and how likely it is going to generate a positive cash flow.
So gross rental yield helps you understand properties quickly when you are looking at 100 different properties and you see one has a 5% gross rental yield and one has a 9% gross rental yield. The 9% property would be more valuable because you are getting more rental income compared to the value of that property. Gross rental yield also gives you the idea of the cash flow potential which is important especially when you want to eventually generate a passive income from your portfolio in order to achieve financial freedom.
However, gross rental yield does not take expense into account. A property may have a high rental yield but might also have high expense making the rental return low.
To take total expense into consideration including both transactional, purchasing as annual cost, a more accurate calculation would be to calculate net rental yield.
Net rental yield = (annual rental income -annual expenses) / total property costs x 100.
For example, if the annual rental income was $25,000, annual expense was $4,000 and the property value was $500,000, then the net rental yield will be (25,000 - 5000) / 500,000 x 100 = 4%
Some expenses or loss of rental income can include:
- Purchasing and transaction costs (property purchase price, legal fees and building inspections, any start-up loan fees)
- Annual costs such as vacancy costs (idle property and advertising)
- Repairs and maintenance
- Property management fees
Accounting softwares for real estate investors such as Kitt can automate these and other vital calculations when it comes to growing your property portfolio.
Kitt utilises unused financial/accounting data which often hauled up in legacy systems like spreadsheets, to make portfolio management and growth simple and straightforward.
No more stacks of paper, spreadsheets or complicated accounting software!
Visit www.kitt.io for more details.