What is the gross rental yield?
The gross rental yield is a metric in the form of a percentage that shows how much cash your rental property generates annually without taking into consideration annual expenses.
How is it useful?
The yield answers vital questions for lenders such as:
- Is this property profitable?
- How much will this property cash flow?
- Should I acquire the investment property?
- Should I sell the investment property?
How do investors calculate the gross rental yield?
Purchase Price Example
Gross Rental Yield = 14%
Gross Rental Yield = $175,000 / $1,250,000
Annual Rental Income = $175,000
Units 1- 4 = $50,000
Units 5 – 8 = $55,000
Units 9 – 10 = $20,000
Units 11-14 = $50,000
Market Value Example
Gross Rental Yield = 10%
Gross Rental Yield = $175,000 / $1,750,000
Purchase Price = $1,250,000
Market Value = $1,750,000
What does a 14% and 10% gross rental yield mean?
The investment properties’ annual cash flow is 14% of the purchase price. At this gross rental yield the investor will recuperate his investment in 7.14 years. The investment properties’ annual cash flow is 10% of the properties’ market value. At this gross rental yield the investor will recuperate his investment in 10 years. The investor will have to raise the properties rent in order to keep up with the property’s appreciation in the market.
What is the optimal gross rental yield?
Investors aim to cash flow at least 1% of the properties purchase prices in rent per month. If the market that the property is in doesn’t permit for that minimum return on investment, investors typically seek a new investment market.