In property investment, investors tend to use the property to generate cash flow for their investment portfolio. Such a cash flow are usually come in the form on rental. Therefore, it is important to identify the potential of a property in generating “cash” to investors.
How to Use Rental Yield to Analyze an Investment Property
Traditionally, many property investors have adopted a rental yield strategy to help them in generating positive cash flow or cash every month. Some investors also use the same strategy to buy and hold a property for future financial goals and taxation purposes. To know how the rental yield strategy works, one needs to know how to calculate the Net Rental Yield for a property.
Gross Rental Yield Per Annum
Gross rental yield is percentage return when renting out your property. To calculate it, just divides annual rental income with the value of the property.
Gross Rental Yield = Annual Income/ Purchase Value of the Property x 100%
For example, you have purchased a property with RM 500,000 and you have rented out with RM 2,000 per month. The calculation will be:
Gross Rental Yield = (RM2,000 x 12)/ RM 500,000 x 100%=4.80%
Net Rental Yield Per Annum
Above calculation shows that the gross rental yield is 4.80%, however, it does not reflect the actual return because other costs may be incurred for the owning the properties.
Net Rental Yield = [ (Annual Income- Annual Cost) / Purchase Value of the Property] x 100%
We know that owning a property requires some annual expenses. Let’s say the annual costs are RM 5,000 per year. Then, we can calculate:
Net Rental Yield = [(RM2,000 x 12) – RM 5,000 ] / RM 500,000 x 100% = 3.80%
How to use the Net Rental Yield to select investment properties?
Net Rental Yield is an important indicator to show whether your investment properties can generate good returns to you.
The question is how big the Net Rental Yield is considered OKAY?
As a rule of thumb, Net Rental Yield should exceed the interest rate of your home loan.
If the interest rate on a home loan is 3.5%, but you are managed to secure Net Rental Yield of 3.80%. It means at least you are making a positive return on your investment property.
Click here for Rental Yield Calculator
Remember that Net Rental Yield is one of the criteria in selecting investment properties. There are many other considerations as well.
Don’t forget to seek an independent and reliable professional to help you.