All You Need to Know About Rental Yield

Imagine investing in a property that not only appreciates in value over time but also generates a steady flow of income through rentals. That’s the power of rental yield! It is a most important metric to evaluate the performance or potential of the property. 

Whether you’re a novice or a seasoned investor, mastering rental yield can significantly impact your investment decisions. 

This blog will throw light on what rental yield means, how to calculate it using gross and net methods, factors that impact rental yield and simple strategies you can use to boost rental yield of your property.

What is Rental Yield & How Is it Calculated?

Rental yield is the yearly rental income earned from the property, as a percentage of its total value. Rental yield is a commonly used term in real estate. It is also one of the crucial metrics while evaluating the return on investment (ROI) of a residential or a commercial property. 

While many investors focus solely on property appreciation, understanding rental yield is equally critical. It not only improves the return on investment (ROI) for both residential and commercial properties but also offers a clear view of the income-generating potential of the property. 

Here’s the formula to calculate rental yield:

Rental Yield = (Annual rental income / property value) *100

Importance of Rental Yield in Real Estate

1. Helps in Decision Making

A high rental yield indicates higher demand and suggests that the property can be a lucrative investment, and vice versa. Calculating rental yield assists investors in making informed property-buying decisions.

2. Market Comparison

Rental yield serves as a benchmark for comparing properties in different areas.

3. Helps Evaluate Profitability

There are two ways to evaluate the profitability of the property – appreciation rate and rental income. While the appreciation rate cannot be ascertained, rental yield can be easy to figure out. By knowing the rental yield, investors can assess how profitable a property is and also compare it with different asset classes.

4. Attracts Investors

Rental yield is one of the most important factors that drives real estate investments in India. A high rental yield attracts more investors to a specific region, leading to a higher demand for properties in that region.

How to Calculate Rental Yield?

There are 2 ways of calculating rental yield:

1. Gross Rental Yield

This is the rental yield you calculate if you consider the total rent, without including any maintenance costs or expenses. 

Here’s the formula to calculate gross rental yield:

Gross rental yield = (annual rental income/property value) * 100

Let’s say that if the property value is 1 Cr and the annual rental income as 3,50,000.

Gross rental yield = (3,50,000 / 1,00,00,000) * 100 = 3.5%

2. Net Rental Yield

The net rental yield also accounts for maintenance costs, and other expenses incurred on the property. The net rental yield gives you a realistic picture about the return on investment of your property. It also helps in decision making 

Here’s the formula to calculate net rental yield:

Net rental yield = (annual rental income – annual expenses)/property value * 100

Let’s take the property value as 1 Cr, annual rental income as 3,50,000 and the annual maintenance as 50,000. 

Net rental yield = (3,50,000 – 50,000 / 1,00,00,000) * 100 = 3%

Both these formulas take into account an annual rental income. To get a healthy rental yield, always ensure that your property is on rent for a steady flow of rental income.

Which Factors Affect the Rental Yield?

1. Location

When it comes to buying a property, location is everything, so is the case when it comes to renting the property. Properties in prime locations with good connectivity, social infrastructure typically have higher rental yields.

2. Type of Property

Rental yield varies as per the type of property. The benefit of buying commercial properties is the higher rental yield compared to residential properties. Different types of properties—such as residential, commercial, or industrial—experience different levels of demand and rental rates, impacting the yield.

3. Condition of Property

Properties that are new, well-maintained tend to have a higher rental yield. Conversely, properties in old and dilapidated state have a low demand and less rental yield.

4. Demand

The rental yield also depends on the demand of rental properties. In cities like Pune, Hyderabad, Bangalore, Mumbai and Gurgaon that are hubs of corporate offices, startups, IT companies, the demand for residential properties is high in specific areas, leading to high rental yield.

How to Increase Your Rental Yield?

To increase your rental yield and ensure that your property keeps on generating a continuous rental income, always implement these steps:

1. Maintain the Property

Improving the condition of the property can increase its appeal. You can consider key repairs like fixing leakages, painting the property every 3 years, upgrading the furniture, etc. to ensure that the property is in demand. A well-maintained property attracts a higher rent.

2. Get the Pricing Right

Conduct a thorough market analysis to understand the rental trends in your area. The right and competitive pricing of your property can help you quickly attract tenants and maximize your revenue.

3. Market Your Property

You can use online aggregators to list your property or tie up with local channel partners to find the right tenant. Recently, some developers have also started offering rental services to their customers. The rental services at Nexzone is one such example. You can leverage such services to rent your property.

4. Target a Niche Market

Who would find your property most appealing? High-net worth individuals? Middle class with nuclear families? Students? Knowing your exact target audience can help you promote your property accordingly and adjust your pricing based on the demand of a particular segment.

5. Consider Short Term Rentals

If your property is located in a tourist-friendly location, you can use platforms like Airbnb for short-term rentals. Properties like villas and farmhouses can be incredibly profitable short term rental options.

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