The many factors that boil into what makes a property valuable can eventually be traced to one thing you want to know. That desired number is what is known as your property yield. A healthy return on your real estate investment is vital toward maintaining your lifestyle and prosperity. Ergo, you may want to conceptualize how much your property is going to earn for you.
Your property yield, in basic terms, is how much of a annual return your property will earn. There are many sort of factors that determine what your precise yield will actually be, all of which can be included in the calculations. Starting off with a baseline estimated return is the best place to start with, however. This isn’t something that can be overlooked, especially if you’re expecting to break even on your owned property.
What Factors Affect Property Yield
Saying “everything is a factor” would be true, but that’s not helpful. When we talk about how to calculate yield, we can look at how it can develop in two ways: gross and net. Both are estimations of how much profit you’ll have either gained or lost by the end of the year.
Gross Yield vs Net Yield
Your gross yield will be a plain percentage without accounting for outside factors. Net yield will be the percentage of what you actually make at the end of the year.
While your net yield is the final determinant of how much return you made that year, it’s a little more flexible than gross yield is.
However, keeping in mind that expenses will occur gives you the motive to prepare for them. Preparing for the worst as a contingency helps maintain profit, high returns, and mitigate losses.
There are still some calculations you can perform to account for expenses. It may not be perfect, but it gives you a good picture of what to look for.
So what can happen that will have an affect on your property yield?
We’ll start with the tenants. If you’re leasing or renting out a property, then the property yield will be directly sourced from those who occupy the space. Depending on the year, you can raise to boost profit or lower rent to entice residents to stay. Ultimately, since your tenants are going to be constantly occupying the property, they’re going to change your property yield by the end of the year.
Tenants may end up causing damage to your property, or not informing you quickly enough about parts that need repairs. Any damage that occurs cuts into your net profits at the end of the year. On the reverse end, you may have a property that doesn’t have tenants at all. As long as it sits unoccupied, you aren’t making a return.
Repairs and Running Costs
Let’s not blame the tenants for everything, though. With time comes damage, and properties are prone to suffer from external sources at some point. Repairs are a necessary aspect of maintaining a quality property to ensure further return. It’s not pleasant, but it must be done regardless.
You’ll need to keep up with running costs as well. Service charges, insurance fees, and the like are going to be steady, reliable costs on your property. Thankfully, running costs are much easier to keep track of.. As far as accounting for your expenditures, you can at least rely on running costs for their consistency.
Fees are a natural part when dealing with upkeep on your properties. These can range from property management fees to stamp duty. Regardless, they’re going to bite into your overall return.
How to Calculate Yield
There are two different calculations to perform if you want to find either your gross or net yield. Successful management of your properties requires an authoritative grasp on your potential returns by the end of the year. Knowing all of your property yield outcomes will help you achieve the highest return at the end of the year.
Both the gross and net yield calculations return as percentages. When learning how to calculate yield, you will be comparing everything against the initial market value of the property when you purchased it. For example, if you purchased a property for $150,000, then every property yield will be working toward covering that cost, so to speak.
Calculating Gross Property Yield
Let’s start with covering how to calculate gross property yield. As we said before, gross property yield is going to be a fairly straightforward equation. Simply put, you’re calculating how much money you’ll receive from your tenants as a percentage of the property’s overall value.
You’ll only need two pieces of data: the annual rental income and the market value of your property.
To find the annual rental income, multiply your tenant’s weekly rental payments by 52. If they pay monthly, multiply it by 12. That number will the annual rental income you receive from your property. If, for example, your tenant’s pay $1,200 a month, then you will annually receive $14,400.
You should already know the market value of your property. For learning purposes, let’s set the market value of said property at $100,000. Take your annual rental income and divide it by the property’s market value.
From there, multiply it by 100 to calculate your gross yield. With an annual payment of $14,400 compared to a property marketed at $100,000, your gross yield is 14.4%.
For ease of viewing, your equation should look like this:
- Gross rental yield = Annual rental income (monthly rental income x 12) / market value x 100
With nothing else considered, if you continued having tenants occupy your property and consistently paid their rent, you would pay off what you initially paid for the property in seven years. From then on, you would be making positive income on your property. Unfortunately, it doesn’t usually work as smoothly as that, due to expenses.
Knowing how to calculate yield involves having a firm understanding of what your net yield will be as well as the gross. For the most part, the net yield is going to be more realistic, and should be what you take into account for more seriously.
Calculating Net Property Yield
To calculate net yield, you need three distinct pieces of data: annual rent income, annual expenses, and total property costs.
To start with, you’ll need to subtract your annual expenses from your annual rental income. This is going to give you the de facto amount you’ll have profited after all expenses are paid. To find the percentage you’re looking for, divide your end-of-year return from the total property costs. The total property costs include the initial purchase of the house, as well as transaction costs.
Once you’re finished, multiply it by 100 and you’ll have your net yield. While the net yield may not be as exact as the gross yield, due to estimations, it’s far more valuable. While the gross yield calculates what your maximum return could possibly be, it’s not exactly realistic since it doesn’t account for expenses.
Your equation should look a little something like this:
- Net yield = (Annual rental income – Annual expenses) / (Total property costs) x 100
Why Is Knowing Your Property Yield Good
It’s simple really. It all comes down to evaluation and planning. Real estate is in constant demand across the United States, and that demand has a heavy effect on your yield when you’re purchasing a property. High demand for real estate means that you’ll need to pay more to invest in a property, and that will impact your overall return. However, vice versa, in times when properties are not in demand, you’ll gain the benefit by purchasing real estate at a lower asking price and increasing your overall return. Regardless of when you’re looking at a new property, you need to make sure you have a plan in place to account for your expense. Frankly, real estate is expensive, and you want to pay off that expenditure as quickly as possible. If you know what your gross and net yields are going to be, then you’ll have better game plan ready for when you begin leasing or renting out your space. Make sure you’ve calculated your expenditures, your returns, and your liabilities before making any decisions.