How to Calculate Rental Yield on Your Investment Property
How much money are you really making on your investment property? Find out with this guide explaining how to calculate rental yield.
Keyword(s): full service property management Seattle , rental property management
Are you interested in investing in real estate? Have you considered how much money your properties could make you? Are you ready to learn from experts in full-service property management in Seattle?
Rental property management is a growing industry. It's only becoming more popular as people learn about the benefits of homeownership and rental opportunities.
One of the first lessons that you need to learn if you're going to become involved in real estate investing is how to calculate rental yield. An accurate rental yield calculation can tell you how much money you're going to bring in from your rental properties. With this information, you can better budget for all of your properties.
To learn more about rental yield for investment property, keep reading.
What Is Rental Yield?
Rental yield is a measure of the return that you're getting from your investment property. A good rental yield is a reflection of a profitable income property.
If you're just getting started with rental property management, you need to make sure that you're getting a good amount of money back on your investment. Otherwise, you're going to lose money that's essential for your business to thrive.
Simply put, an investment property rental yield calculation can tell you whether you're making a profit on that specific property.
How Do You Calculate Rental Yield?
There are two rental yield calculations that you should take into consideration:
- Gross rental yield
- Net rental yield
Each one is important to calculate as they can each give important information regarding the rental property that you're analyzing.
Gross Rental Yield
Gross rental yield is the annual rental income divided by the property's value. Since the value is a yield, it's expressed as a percentage.
As you're calculating gross rental yield, you need to understand what's included in the complete property value. It's more than the property itself. You must add on any closing costs and renovation costs that you've put into the property.
With this in mind, you can begin to calculate the gross rental yield:
Gross Rental Yield (%) = (Annual Rental Income / Property Value) x 100
Let's look at an example.
You find out that your rental property's value comes out to $200,000, including closing costs and renovations. You rent this property out for $1,000 a month. Since we want the annual rental income, we'd multiply $1,000 by 12 to get an annual income of $12,000.
So, your gross rental yield would be $12,000 divided by $200,000, which is 0.06. Then, after multiplying by 100 to get a percentage, we'd get 6%.
Net Rental Yield
Net rental yield gives a more complete look at the profit that you're getting from a rental property. Gross rental yield misses one very important piece of the puzzle: expenses.
The net rental yield, also known as the capitalization rate (or cap rate), includes any and all operating expenses that you put into the property. Because of this, net rental yield is a better representation of a property's profitability.
While gross rental yield is an important calculation to consider, you wouldn't want to neglect calculating important operating expenses that could be cutting into your property's profits.
Here are a few examples of operating expenses that you should consider while calculating the net rental yield:
- Management fees
- Legal fees
- Loan fees
- Vacancy costs
- Insurance costs
After you've gathered all of this information, you can successfully calculate the net rental yield.
Start by subtracting your annual expenses from the annual rent. Then divide this number by the property value. To get a percentage, multiply that number by 100.
Here is the formula:
Net Rental Yield (%) = ((Annual Rent - Annual Expenses) / Property Value) x 100
Let's look at the net rental yield by using the previous example. Let's add that you have annual expenses of $2,000.
The annual rent ($12,000) minus the annual expenses ($2,000) comes out to $10,000. $10,000 divided by the property value ($200,000) is 0.05. After multiplying by 100, you'll get 5%, which is a total of 1% less than the gross rental yield that we calculated.
What Is a Good Rental Yield in Seattle, WA?
Your definition of a good rental yield is likely going to be different from someone's else definition. However, the average expectation for rental yield lies between 7% and 8%.
Given that Seattle, Washington is an area with high rental prices, your expectation for a good rental yield in this area may lie a bit higher than the average.
As you're considering your investment property's rental yield, you need to take a few things into account. The percentage isn't the only thing that matters.
A high rental yield isn't the only consideration that you should have when you're choosing profitable rental properties. One of the major goals of rental investing is capital growth. While properties with high rental yields are secure, low-risk investments, they may not be great for long-term growth.
If you're just starting out with real estate investing, these are great properties to pad your portfolio with. However, as you add more properties to your rental property management line-up, you should add some more high-risk properties into the mix.
These properties are going to require some investment, but they'll make you more money in the long run.
These higher-risk properties may include those that need several upgrades or other kinds of renovations. However, if you have enough income from your other properties, you can make these investments and turn a profit with your investment.
Again, we only recommend this strategy after you have a few low-risk properties under your belt. You want to make sure that you have guaranteed income before you start betting on higher-risk properties.
Hire Full Service Property Management in Seattle, WA
If you want all of the benefits of a high rental yield without having to worry about caring for the property itself, you should take advantage of full-service property management. Property management experts take a small cut of your return in exchange for taking care of the property's needs.
If you have one or multiple rental properties in Seattle, WA, you should take advantage of our full-service property management in Seattle. We handle marketing, leasing, maintenance, and more!