Rental Yield: Introduction and How it’s calculated
If you are into investing by listing out your property for rent, whether it's land, a house, townhouse, condominium, office, or a commercial building, you will most likely be aware of how much money you will make from the investment along with how to correctly calculate a rental yield accordingly. Today PropertyScout will be explaining to you what a rental yield is and how it's calculated.
What is a rental yield?
A rental yield is a compensation rate from the property rental, which can be calculated as percentage per year. What matters about a rental yield is it helps you calculate the compensation you will be granted from a condominium investment along with the monthly rental price of your condominium investment. Furthermore, it allows you to plan your investments correctly before buying a condominium to list it for rent as well.
How much should a rental yield be?
A rental yield should be close to buying a condo for speculative purposes. You decide the price for the condo you decide to list out for rent, in which the rental yield must be around 6-8% per year. As for condo investors who request for a loan from the bank in order to buy a condo for rental investment, to which the interest must be paid to the bank as well, the rental yield must then be at least 2-3% higher than the interest to be paid.
How is a rental yield calculated?
There are three possible ways to calculate a rental yield, which includes gross rental yield, net rental yield, and cash-on-cash rental yield. Each method vary in the way of components to calculating how much money you will make off of the property you list out for rent.
1. Gross Rental Yield
Gross Rental Yield = (Total annual rent/Total condo price) x 100
Example: A condo's price is 2,000,000 baht, rental price is 15,000 baht per month, making the total annual rental price 180,000 baht.
(180,000/2,000,000) x 100 = 9%
This method is recommended for investors who buy condominiums in cash and are not charged with interest on loan.
2. Net Rental Yield
Net Rental Yield = ((Annual rent - Total Expenses)/Total condo price) x 100
Example: A condo's annual rent is 180,000 baht and the total expenses is 14,000 baht, while the condo's full price is 2,000,000 baht.
((180,000 - 14,000/2,000,000) x 100 = 8%
This method is recommended for investors buying condominiums who have additional expenses such as common fees or agent fees.
3. Cash-on-cash Rental Yield
Cash-on-cash Rental Yield =
((Annual rent - Condo installment loan per year)/Total money used for buying the condo) x 100
Example: A condo's price is 3,000,000 baht, you pay 700,000 baht in cash, divided into contract payments, condo down payment (20%), decoration costs, and then you ask for a bank loan with monthly installments of 14,000 baht, which amounts to an annual loan installment of 168,000 baht, assuming it can be rented out at 18,000 baht per month, deducting the commission fee equal to the cost. 1 month rental and common fee 18,000 baht/year, equal to having annual rental income after deducting expenses of 180,000 baht/year when calculated, the result will be as follows:
!(180,000 – 168,000)/700,000) x 100 = 1.7%
Conclusion
We hope you found this article regarding the rental yield and ways of calculating informative. If you were initially confused or intimidated by the topic, hopefully you now understand better on what it is and how it could be done. Just have a good rough estimate, pick the right calculation method, and you should be able to make money from the property you decide to list out for rent in no time!
Got further questions? Contact us!
If you still have any further questions regarding the rental yield or anything related to buying, selling, or renting a property, please don't hesitate to speak up and contact us. Our property consultant team will be very happy to help you answer your questions and concerns.
