There are many ways to assess the success of a rental property, but one of the most effective, tried-and-true ones is the rental yield. This tool helps investors determine how much income a property generates in relation to its cost. In turn, this offers a clear, succinct snapshot of a property’s profitability. In this article, we’ll break down exactly why your rental yield is essential to use, how to find it, and finally, how to calculate it for your property.
What Is the Rental Yield (and Why Does it Matter?)
Property management companies in Northern Virginia think of the rental yield as a quick way to check if your investment property is actually making a profit. It compares your property’s income to its market value, showing how much of that value you’re getting back in the rent each year as a percentage. The bigger the percentage, the better your returns. On the other hand, if your rental yield is too low, that might indicate you need to raise the rent to increase profitability.
Moreover, you can use the rental yield to compare the different properties and locations’ profitability against one another. This way, you can make sure you put your money where it will grow the most. Furthermore, lenders and banks often look at your yield to assess risk. A high yield can make it easier to secure loans or get better financing options for future investments.
All in all, your rental yield gives you clarity—whether the property you have is a solid investment or if you need to pivot your plans to have a better one.
How Do You Calculate Rental Yield?
Let’s keep things simple. There are two types of rental yield: gross and net. Here’s how to calculate both, using an example in which you bought a property for $500,000 and rented it out for $2,500 per month.
Gross Rental Yield
The gross rental yield is the one you get before factoring in expenses. This is the simplest way to measure rental returns. Essentially, you just compare the annual rent to the property’s market value.
Formula:
(Annual Rent ÷ Property Price) × 100
Calculation:
($2,500 × 12) ÷ $500,000 × 100
$30,000 ÷ $500,000 × 100 = 6%
So, the gross rental yield is 6%.
Net Rental Yield
On the other hand, the net rental yield gives a more realistic picture. It factors in expenses like property taxes, maintenance, insurance, and management fees. For this example of it, let’s say your annual expenses total $5,000.
Formula:
(Annual Rent – Annual Expenses) ÷ Property Price) × 100
Calculation:
($30,000 – $5,000) ÷ $500,000) × 100
$25,000 ÷ $500,000 × 100 = 5%
So, after expenses, your net rental yield is 5%.
Note: In the U.S., rental yields vary based on location, property type, and market conditions. On average, gross rental yields sit around 6.1% as of 2024. Some areas report even higher yields, reaching up to 8%. Generally, one that’s between 5% and 10% is considered solid, offering a balance between profitability and risk.
Factors That Impact Your Results
We can’t talk about rental yield without looking at what impacts it the most. By now, you know that a higher one means your investment is making more money, while a lower yield might mean higher costs or lower rental income. Here are some key factors that can impact it:
Location: Properties in high-demand areas with good infrastructure, schools, and amenities tend to rent for more, increasing your yield. On the other hand, if your location has a seedy reputation, increasing crime, or poor upkeep, that can give your yield a damaging blow. As they say in this industry, your location is everything.
Supply and Demand: Too many rental properties in an area can drive rents down, while limited supply in a desirable neighborhood can push rental prices up—directly impacting your returns. So, you should look at the trajectory of availability in your area.
Market Trends: Your rental property doesn’t exist in a vacuum. Economic conditions, interest rates, and local job markets all affect rental demand and pricing. Then, in turn, this impacts your yield. As such, you need to be sure to do your research on the state of your local market.
Leverage: If you’ve financed your property with a mortgage, your loan repayments and interest rates can impact your yield. A well-managed loan can enhance your returns, but high debt can eat into your profits.
Start Maximizing Your Profits Today with BMG
Owning a rental property is more than just about keeping it in order and collecting the rent—it’s about making sure your investment is actually profitable. While gross rental yield gives you a quick estimate, net yield is what really matters because it shows your actual earnings after expenses. The higher your net yield, the more money you’re making.
Bay Property Management Group is here to streamline your rental property and boost your ROI. We can handle inspections, legal compliance, maintenance, repairs, and so many other responsibilities that are necessary for retaining tenants and your property’s value alike. In addition, we can develop targeted marketing campaigns for your specific market and various social media channels. To boot, we have an accounting team, so we can crunch the numbers for you and analyze the weak (and strong) spots you need to improve in. So, ready to boost your rental yield? Contact us today!
