Rental property is a popular way for investors to get regular income from real estate. However, knowing simply the monthly rent about your property is not enough for deciding whether it is a good investment or not.
You need to also consider the monthly rental income compared to an entire sum that you have invested in a given property to get the right value.
Let see how one can calculate rental yield, examples, factors, and how to calculate rental yield in India.
What Is Rental Yield?
In simple terms, this metric reflects how much profit a property produces per year about the price for which the owner has acquired it or its value. For example, if one has purchased an apartment for ₹50 lakh and is able to earn an income of ₹2.5 lakhs annually in rent, the gross rental yield would be:
Gross Rental Yield = (₹2.5 lakhs ÷ ₹50 lakhs) × 100 = 5% = 5%
This implies that the rental property has a 5% yield per year.
How to Calculate It?
The standard formula can be presented as the following:
Rental Yield (%) = (Annual Rental Income ÷ Property Purchase Price) × 100
To determine it, one needs two figures: an annual rental income and the sum for which a property has been purchased or its estimated value.
An Example of Calculating Rental Yield
Say that an investor has bought a residential property for ₹60 lakh and is able to expect that it will bring in ₹25,000 in rent every month. In such a case, an annual rental income will equal:
Annual Rent = ₹25,000 × 12 = ₹3,00,000
Having determined it, one can use the standard formula from above:
Rental Yield (%) = (₹3,00,000 ÷ ₹60,00,000) × 100 = 5%
Which means that the rental property has a 5% gross yield per year.
How to Calculate It in India?
When asking “how to calculate rental yield in India,” it is important to remember that there may be additional expenses that a property owner incurs when purchasing and operating an asset. Aashray Realtors is your trusted guide for all property-buying needs. For instance, one may have paid additional amounts for:
• Registration and stamp duties; and
• Interior and renovation works.
For a rough estimation, let’s take the following example:
Property purchase price – ₹50 lakh
Registration and stamp duty – ₹4 lakh
Interior and renovation – ₹3 lakh
Total investment – ₹57 lakh
Monthly rent – ₹25,000 – an annual rent equals ₹3 lakh
Now one can calculate it using the standard formula:
₹3 lakh ÷ ₹50 lakh × 100 = 6% = 6%
However, a more accurate calculation would utilise the total sum of investment:
₹3 lakh ÷ ₹57 lakh × 100 = 5.26% = 5.26%
The Net and Gross Yield of Your Rental Property
There are two main ways of presenting rental yield: gross and net.
Gross rental yield ignores any expenses and can be calculated using the following formula:
Gross Rental Yield = (Annual Rent ÷ Property Value) × 100
With this approach, an investor can roughly estimate how much income a property can potentially bring and how different investment options compare to each other.
Net rental yield, in its turn, reflects expenses that an investor might need to pay when maintaining a property and managing it. These expenses may include:
• Property maintenance and repair;
• Property management charges;
• Insurance;
• Society or maintenance charges;
• Property taxes;
• Vacancy periods; among others.
A general formula for net rental yield can be presented as:
Net Rental Yield = (Annual Rental Income − Annual Property Expenses) ÷ Total Investment × 100
For instance, if an annual rental income (ARR) is ₹3 lakhs and annual expenses (APE) sum up to ₹50,000, the net rental income will equal to:
Net Rental Income = ₹3,00,000 − ₹50,000 = ₹2,50,000
And with the total investment equal to ₹50 lakhs, the net rental yield will be:
Net Rental Yield = (₹2,50,000 ÷ ₹50,00,000) × 100
= 5% = 5%
Net rental yield can be a more practical way of determining a rental property’s performance.
Why It Is Important to Calculate It for Your Property
Knowing how to calculate it may help an investor in several ways.
First, it can help to compare different properties using a particular metric that reflects their performance.
Second, it provides an estimate of rental income that a property may potentially bring.
And finally, when an investor knows the expected ARR and compares it to projected expenses, it becomes easier to determine the expected net rental income.
By the way, when calculating net rental yield, a property owner needs to reflect all potential expenses. It is advisable to consult with a specialist to ensure that everything has been taken into consideration.
Factors That Impact It
Several factors may impact the yield of a rental property.
The most important among them are:
Location
One of the most critical factors that impact it is a location. Generally, the more offices, restaurants, schools, and other infrastructure there are in a certain area, the higher the demand for a property there will be.
Price
The purchase price is another important factor. A higher price may lead to a lower yield if an investor is not able to get sufficient ARR to cover expenses.
Monthly rent
An increase in monthly rent may raise it.
Vacancy
A longer vacancy period means fewer rental payments from tenants and, therefore, lower yield.
Expenses
Expenditures on property maintenance, tax, repair, management, vacancies, and other expenses can reduce the net rental income, which, in turn, will lower the net rental yield.
Type
Apartments, independent houses, shops, residential buildings, commercial properties, and other types of real estate have different demand and bring different rental incomes.
Example: How to Calculate Yield Step by Step
Let’s imagine that there is a property with a purchase price equal to ₹75 lakhs and a monthly rent of ₹30,000. An annual rent will equal:
Annual Rent = ₹30,000 × 12 = ₹3,60,000
Now, let’s substitute the values into the standard formula from above:
Gross Rental Yield = (₹3,60,000 ÷ ₹75,00,000) × 100 = 4.8%
So the gross rental yield of the property will be 4.8%. Now, let’s also consider the scenario where the annual expenses are equal to ₹60,000:
Net Rental Income = ₹3,60,000 − ₹60,000 = ₹3,00,000
And net rental yield will equal:
Net Rental Yield = ( ₹3,00,000 ÷ ₹75,00,000) × 100 = 4% = 4%
It is also important to note that an increase in property value (“appreciation”) is a separate concept.
The value of a property may grow significantly after the investor has purchased it. This may be caused by various factors, including market conditions, real estate demand, geographical location, etc. However, even if a property has a high appreciation, a low yield may indicate that it will not be particularly lucrative.
Concluding remarks
A basic understanding of how to calculate rental yield for an income-generating property is essential for every experienced and inexperienced investor. In general, it is a simple calculation, which involves dividing an annual rental income by a purchase price or an estimated value of a property and multiplying the result by 100.
But when determining a rental yield in India, investors should remember that they need to consider many expenses that are related to maintaining, operating, managing a property, and paying off taxes. It is advisable to also remember that rental income depends on a property’s location, its estimated or purchase value, its type, its potential appreciation, and other factors.
With respect to the calculation itself, it is crucial to utilise realistic numbers for rent, expenses, and property value to get accurate results. The latter will enable an investor to determine the profitability of a rental property and compare it to other potential options.