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Rental Yield

Discussion in 'Investing Glossary' started by Glossary, 28th Sep, 2006.

  1. Glossary

    Glossary Active Member

    Joined:
    12th Sep, 2006
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    25
    Definition:

    Yield is a measure of the percentage of income return you get from an asset. This measure applies to a number of assets, but especially shares and real estate.

    For real estate, the yield calculation is the percentage of rental income for the purchase price. The yield is calculated by dividing the gross annual rental income by the purchase price (or the current valuation).

    Example, if a property is rented for $315 per week, and the purchase price is $409,000, then the yield is (315*52)/409000 = 4.01%

    Purchase price versus current valuation
    Rental yield can either be expressed as a percentage of purchase price, or current valuation.

    Yield calculated with the current gross rent and the original purchase price will provide an indication of how much rents have increased (or decreased!) since purchase.

    Yield calculated with the current gross rent and the current valuation allows you to monitor several aspects of your investment property.

    Falling yields either means an oversupply of rentals and hence falling rents; or else a rising property market with valuations increasing; or both!!

    Increasing yields either means a strong rental market with rising rents; or else a falling property market with dropping valuations; or both!!

    One of the more useful measures is to start with an accurate indication of the current valuation of your property and other similar properties in the region, and also current rent prices being achieved in those properties - giving you a measure of the yields typical for the area. You can then use this data to determine whether you are over- or under-charging in rent on your own property.

    Cashflow positive
    Yield is often used as a quick measure of how likely a property is to be cashflow positive? (that is - income exceeds expenses, leaving a net surplus income from the investment). In rough terms, if the rental yield is 2-3% higher than the current interest rates, then the property is likely to be cashflow positive. However, this depends on a lot of factors and assumptions - and is beyond the scope of this entry.