How to Calculate Rental Yield
A comprehensive guide to understanding and calculating gross and net rental yields for property investment
There are two forms of rental yield: gross rental yield and net rental yield. Gross rental yield is a simpler metric that doesn't take the property's expenses into account, while net rental yield does. Net rental yield is usually a better metric to look at because expenses don't always scale linearly with income, meaning that as you earn one dollar in income, the expenses associated with that income are not always the same for different properties.
Gross rental yield is simply the annual rental income of the property divided by the value of the property.
Formula:
Where:
- Annual Rent = the total amount of rental income earned in a year
- Property Value = the value of the property
Gross Yield Example
Suppose you are looking at investing in a property with the following details:
- Property Price: $500,000
- Number of Units: 10
- Rent per Unit per Month: $1,500
Step 1: Calculate Monthly Income
10 units × $1,500 = $15,000 per month
Step 2: Calculate Annual Income
$15,000 × 12 months = $180,000 per year
Step 3: Calculate Gross Yield
($180,000 / $500,000) × 100 = 36%
Result: The property has a gross rental yield of 36%
Net rental yield is a more accurate metric that accounts for all property expenses. The expenses can include taxes, insurance, repairs, vacancy costs, or really anything that it takes to maintain the property. Note that debt expenses like mortgage repayments and interest are not usually included as expenses since they are related to the investor's finances and not related to the property itself.
Formula:
Where:
- Annual Rent = the total amount of rental income earned in a year
- Property Value = the value of the property
- Vacancy Rate = the percent of time your property is vacant (expressed as a decimal)
- Annual Expenses = total annual cost of owning the property
Note: Multiplying the annual rent by (1 – Vacancy Rate) is the same as taking your total annual income and subtracting the income you will lose because of vacant units in your property.
Net Yield Example
Using the same property from the gross yield example, let's calculate net rental yield with additional information:
- Property Price: $500,000
- Annual Rent: $180,000
- Expected Vacant Units: 1 out of 10 units on average
- Annual Expenses: $25,000 (taxes, insurance, maintenance, etc.)
Step 1: Calculate Vacancy Rate
1 vacant unit / 10 total units = 0.10 (10%)
Step 2: Calculate Effective Annual Rent
$180,000 × (1 - 0.10) = $180,000 × 0.90 = $162,000
Step 3: Subtract Annual Expenses
$162,000 - $25,000 = $137,000
Step 4: Calculate Net Yield
($137,000 / $500,000) × 100 = 27.4%
Result: The property has a net rental yield of 27.4%
| Metric | Gross Yield | Net Yield |
|---|---|---|
| Calculation | Simple | More Complex |
| Includes Expenses | No | Yes |
| Includes Vacancy | No | Yes |
| Accuracy | Lower | Higher |
| Best For | Quick comparisons | Detailed analysis |
| Example Result | 36% | 27.4% |
- •Gross yield is easier to calculate but less accurate as it ignores expenses and vacancy
- •Net yield provides a more realistic picture of your investment returns
- •Always account for vacancy rates when calculating net yield
- •Include all property-related expenses: taxes, insurance, maintenance, HOA fees, management fees
- •Mortgage payments are typically not included in net yield calculations
- •Use our Rental Yield Calculator to quickly calculate both gross and net yields
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