Rental Yield Calculation Formula – While real estate investment is growing all over the world, the number of people directing their investments in rental properties inside real estate investment is growing too, as they think of rental properties as an easier and more secure way for investing in real estate.
Throughout this article, the meaning of rental properties investment will be clarified, in addition to the “rental yield calculation formula”.
What are rental properties?
Rental properties are that type of property that their owner rents all their divisions to individuals. It means that an investor decides to buy a building or a property and then starts renting it for other “occupants”; those occupants could pay the rentals monthly, bi-annually, or even annually.
Why do investors think of investing in rental properties?
Many people who are not aware of the whole process of investing in real estate, but want to invest their money in this field due to its high profitability, are advised to start investing in rental properties, because this way they secure more cash flow, and have less headache than when reselling the property.
What is the “rental yield calculation formula”?
“Rental yield calculation formula” is the formula used to calculate the revenue coming from renting this property for a certain period. Property owners usually use this formula to calculate how much money renting will bring each month or as a percentage of a property’s purchase price.
Steps of “Rental yield calculation formula”:
1- Calculate all the costs related to the property such as:
- Purchase price
- Operational costs
- Renovation costs (if found)…etc.
2- Calculate the annual rent as a percentage of the total property value, this is known as the “Gross rental yield”
3- If an investor wants to calculate the net rental yield, subtract the annual running costs from the annual rent before calculating it as a percentage of the total property value.
How can an investor know if the percentage of the rental property is satisfactory or not?
Only the investor is able to answer this question. The satisfaction is different from one person to another: it depends mainly on whether this income is covering the needs of the investor or not, but the bottom line of the percentage to be acceptable is to become more than what the interest rate a bank could give the investor if this money was in the bank.
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