What is the net rental yield?
The net rental yield is a metric in the form of a percentage that shows how much cash your rental property generates annually after deducting expenses. The NRY is a percentage indicator of the property’s profitability relative to the property’s value.
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 much money should be set aside for expenses?
- Is this a smart investment?
- Does the owner need to raise the rent?
How do investors calculate the net rental yield?
The property value could be one of two numbers:
1. the purchase price
2. the market value of the property. Both options have different purposes. The purchase price is used when measuring the present-day performance of the property. The market value is used when measuring the future performance of the property.
Expenses to take into consideration: vacancy, marketing, repairs, maintenance, property management, insurance, taxes, and utilities.
Purchase Price Example
Purchase Price Example
Net Rental Yield = 16%
Net Rental Yield = $200,000 / $1,250,000
Annual Profit = $200,000
Annual Rental Income = $250,000
Annual Expenses = $50,000
Market Value Example
Net Rental Yield = 11.4%
Net Rental Yield = $200,000 / $1,750,000
Purchase Price = $1,250,000
Market Value = $1,750,000
What does a 16% and 11.4% net rental yield mean?
Based on the purchase price: the investment property’s annual profit is 16% of the purchase price. At this net rental yield the investor will recuperate his investment in 6.25 years. Based on the property’s market value: the investment property’s annual profit is 11.4% of the property’s market value. At this net rental yield the investor will recuperate his investment in 8.77 years. The investor will have to raise the property’s rent in order to keep up with the property’s appreciation in the market. Investors will also note that the 8.77% doesn’t meet the optimal rental yield of 1% per month.
What is the optimal net 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.