Property Rental Yield Calculator

What is Rental yield?

Rental yield is the annual income generated from a rental property expressed as a percentage of its total purchase price.

It helps property investors evaluate the profitability of their investments.

There are two types:

• Gross rental yield, which does not account for expenses
• Net rental yield, which includes costs like maintenance and taxes.

This metric is crucial for comparing property investments and maximizing returns.

How to calculate the rental yield of purchased property?

Calculating rental yield is essential for property investors looking to assess the profitability of their investments.

Here’s a step-by-step process to help you calculate both gross and net rental yield for your purchased property.

Step 1: Gather Necessary Information

Before you begin, collect the following data about your property:

• Property Purchase Price: The total cost of purchasing the property.
• Monthly Rent: The amount you expect to charge tenants each month.
• Annual Costs: Any expenses associated with the property, such as maintenance, property management fees, insurance, and taxes.

Step 2: Calculate Annual Rental Income

To find the annual rental income, multiply the monthly rent by 12:

Rental Yield Formula:

$\text{Annual Rental Income}=\text{Monthly Rent}\times 12$

Example:
If your monthly rent is £1,200:
Annual Rental Income = £1,200×12 = £14,400

Step 3: Calculate Gross Rental Yield

Now that you have the annual rental income, you can calculate the gross rental yield. This figure gives you an initial view of your rental income relative to the property value.

Formula:
Gross Rental Yield=(Annual Rental Income / Property Purchase Price) × 100

Example:
If the property purchase price is £250,000:
Gross Rental Yield = (£14,400/£250,000)×100 = 5.76%

Step 4: Calculate Net Rental Income

Next, determine your net rental income by subtracting the annual costs from the annual rental income:

Formula:
Net Rental Income = (Annual Rental Income −Annual Costs)

Example:
If your annual costs are £3,600:

Net Rental Income = £ 14 , 400 − £ 3 , 600 = £ 10 , 800

Net Rental Income = £14,400−£3,600=£10,800

Step 5: Calculate Net Rental Yield

With the net rental income calculated, you can now find the net rental yield, which provides a more accurate picture of your investment’s profitability after expenses.

Formula:
Net Rental Yield = (Net Rental Income/Property Purchase Price) × 100

Example:
Using the previous example:
Net Rental Yield = (£10,800/£250,000) × 100 = 4.32%

Step 6: Analyze Your Results

Now that you have both gross and net rental yields, you can analyze these figures:

• Gross Rental Yield gives you an idea of the potential income before expenses.
• Net Rental Yield provides a clearer picture of your actual return on investment after costs.

How to work out rental yield?

To calculate rental yield, which is a key metric for assessing the profitability of a property investment, you can use the following straightforward formulas:

Types of Rental Yield

1. Gross Rental Yield

This measures the total rental income without accounting for any expenses.

Formula:

Example: If a property generates an annual rental income of ₹3,00,000 and its market value is ₹60,00,000, the gross rental yield would be:

2. Net Rental Yield

This provides a more accurate picture by factoring in expenses associated with owning and managing the property.

Formula:

Example: Continuing from the previous example, if the annual expenses amount to ₹50,000:

Steps to Calculate Rental Yield

1. Determine Annual Rental Income: Multiply the monthly rent by 12 to get the annual figure.
2. Find Property Value: Use the current market value or purchase price of the property.
3. Calculate Gross or Net Yield: Use the respective formulas above.

Factors Influencing Rental Yield

• Location: Properties in prime areas typically have higher yields due to increased demand.
• Property Type and Size: Different types of properties (e.g., apartments vs. single-family homes) can yield differently based on market demand.
• Management Efficiency: Well-managed properties tend to attract better tenants and retain them longer, impacting yield positively.

How Rental yield is different for purchased property and current property value?

Rental yield based on Property Purchase Cost reflects the return on investment relative to the initial amount paid for the property, providing a historical perspective on profitability.

Rental yield based on Current Property Value evaluates the return based on the property’s current market worth, which may account for appreciation over time. 

How payback period is calculated in rental yield?

The payback period is the time it takes to recover the initial investment in a rental property through the net operating income (NOI) generated.

Here’s how to calculate the payback period:

Payback Period = Total InvestmentAnnual Net Operating Income

​Where:

• Total Investment: The total cost of acquiring and preparing the property for rental, including the purchase price, closing costs, renovations, etc.
• Annual Net Operating Income: The net income generated by the property after deducting operating expenses like property taxes, insurance, maintenance, etc. from the annual rental income.

Example:
Let’s say you purchased a rental property for £250,000 and spent an additional £25,000 on renovations. Your total investment is £275,000.

The property generates an annual rental income of £30,000. After deducting £10,000 in annual expenses, your net operating income is £20,000.

Putting these values into the formula:
Payback Period = £275,000/£20,000 = 13.75 years

This means it will take approximately 13.75 years to recover your initial investment of £275,000 based on the property’s net operating income of £20,000 per year.

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