Calculation of real estate rental yield: a simple method
Investing in rental real estate can be an excellent source of additional income. However, it is essential to know the return on your investment before you get started. Fortunately, there is a simple method to calculate real estate rental yield.
What is real estate rental yield?
The real estate rental yield is an indicator that measures the profitability of a rental real estate investment. It allows you to know the percentage of income generated in relation to the total cost of the investment.
How to calculate real estate rental yield?
Calculating real estate rental yield can be done by following these simple steps:
1. Calculate your annual rental income: Add up all the income you receive from your rental property (rent, rental charges, etc.) over a full year.
2. Deduct your annual charges: Subtract all charges related to your rental property (property taxes, management fees, work, etc.) over a full year.
3. Divide the result obtained by the total cost of the investment: The total cost of the investment includes the purchase price of the property, notary fees, possible work, etc.
4. Multiply by 100 to obtain the percentage of real estate rental yield.
Example of calculating real estate rental yield
Let’s take a concrete example to illustrate this calculation:
Let’s say you bought an apartment for 200,000 euros, and you receive 12,000 euros in annual rental income. The charges linked to your property amount to 4,000 euros per year.
1. Annual rental income: 12,000 euros
2. Annual charges: 4,000 euros
3. Total cost of the investment: 200,000 euros
4. Real estate rental yield = [(12,000 – 4,000) / 200,000] x 100 = 4%
In this example, the real estate rental yield is 4%.
Interpretation of real estate rental yield
A high property rental yield indicates that your investment is generating significant income compared to its total cost. A rental yield of 4% or more is generally considered acceptable, but it is important to consider other factors such as the location of the property, the state of the local property market, etc.
It is also important to note that the real estate rental yield does not take into account the potential capital gain of the property in the long term. If you plan to sell your property after a few years, it is essential to take this aspect into account when evaluating your investment.
In conclusion, calculating the real estate rental yield is essential to assess the profitability of a rental real estate investment. Use this simple method to make informed decisions and maximize your income.