What is rental yield?
zaraide April 29, 2021If you are planning to invest in a flat in Kochi to rent it out, extreme caution should be applied! You might end up sustaining losses in place of making profits if you are not careful. This is why it is important for landlords to calculate the rental yield of the property before they let out.
Rental yield can be defined as the rate or the percentage of returns from the rental income of an investment property. It is also called the rate of returns from an investment. Before putting a property on sale in the market, real estate brokers and sellers often calculate the rental yield.
How is rental yield calculated?
Rental yield for flats for rent in Kochi can be gross rental yield and net rental yield.
Gross rental yield is the annual rental income from the property value. It does not include the maintenance charges of this property or the amount that you pay in taxes. It is simply the income you earn as yearly rent.
Gross yield = (annual rental income/ property value) x 100
Annual rental income = monthly rent x 12
Property value = Purchase value of the property
Suppose, you bought a property for Rs 20 lakh and have been earning an annual rental income of Rs 1.20 lakh. The gross rental yield, in this case, would be six per cent.
As gross yield doesn’t factor in the expenses associated with the upkeep of a property, high gross yield does not necessarily mean good rental income. High maintenance costs might bring down the profit substantially.
Before calculating the net rental yield, all types of cost associated with the property should be considered. This can be transaction costs, taxes, ongoing fees, expenses, maintenance cost etc.
Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100
You can arrive at the net rental yield after deducting the annual expenses from the annual rental income.
Again, for a property of Rs 30 lakh, where the annual rental income is Rs 1.80 lakh and the annual expenses are Rs 12,000, the net rental yield would be 5.6 per cent.
Why rental yield is important for home buyers?
Home buyers always give emphasis on Rental Yield to understand how good the property can be if they want to earn a healthy income from their investment. The Rental yield can be compared with interest rates offered by other investment channels like stocks, mutual funds, fixed deposits and gold. The net rental yield is considered more by home buyers as it is more practical and realistic as compared to gross yield.
A good rental yield is usually considered to be between 8-10%. While a low rental yield is anywhere between 2-4%. For an investor, high rental yields above 5.5% are better as they usually generate a steady cash flow.
