Method 1 of 3: Totaling Property Costs Download Article
- Even if you don’t have a mortgage, you’re likely still responsible for property taxes on the property. Those would also be considered part of your costs of ownership.
- If you don’t own the property yet, use an estimate of mortgage payments or get an offer from a mortgage company for the property and use that number instead.
- In addition to landlord’s insurance, you may also want to consider other types of insurance to cover damage to the property.
- Rent insurance may also be available to you, which provides you some money in the event your tenant breaks their lease or needs to be evicted for nonpayment of rent.
- For example, if you only own the building but not the land, you may have to pay rent for the land that the property sits on.
- If you have a unit in an apartment building or condominium complex, you may also have association fees to consider.
- You also want to consider major repairs that may be necessary in the event of a natural disaster or other event. While your insurance may cover some of this expense, you’ll likely still have to pay a deductible.
Method 2 of 3: Determining Gross Rental Yield Download Article
- For example, if you rent the property out for $500 a week, you would have an annual rental income of $26,000.
- If you’re looking at a property for sale, use the asking price as the value of the property, even if you think the asking price is too high and plan to make a lower bid on it.
Divide the rental income by the value to find the gross rental yield. Once you have those two figures, complete the equation. Your result will be a decimal value. Multiply that number by 100 to get a percentage.
- For example, if your yearly rental income is $26,000 and the property is valued at $360,000, you have a gross rental yield of 7.2%. Gross rental yield is considered ideal if it’s somewhere between 7 and 9%, so the gross rental yield for that property is good. Any lower than that, and you likely wouldn’t have the cash flow in the event emergency repairs were needed.
Warning: While gross rental yield is easy to calculate, it doesn’t take a lot of other factors into account that can affect the investment value of a property, such as the property’s location, age, or condition.
Method 3 of 3: Calculating Net Rental Yield Download Article
Start with your total yearly rental income. Just as when working out gross rental yield, you’ll need the total rent you collect from the property in a year. Multiply weekly rent by 52 and monthly rent by 12 to find the annual amount.
- For example, if you rented a condominium for $2,000 a month, your annual rental income would be $24,000.
Tip: Net rental yield is typically calculated at the end of the year, looking back at real numbers. If the property was vacant for any period during the year, don’t include the rent you would have received for that time in your yearly rental income total.
Subtract your annual expenses from the rental income. For net rental yield, you’ll also take into account the other costs of owning the property. Include all fees, mortgage payments, interest, taxes, insurance premiums, and other costs associated with the property for the year. Typically these will be monthly expenses, so don’t forget to multiply them by 12 to get the annual total.
- For example, suppose your annual rental income was $24,000 and the condominium unit cost you $900 a month to maintain. Your annual cost to own the property would be $10,800. When you subtract $10,800 from $24,000, you get $13,200.
Divide the result by the current value of the property. The current value of the property is not your mortgage payment, which likely includes interest, taxes, and other fees. Instead, look at the value of the most recent appraisal of the property. That’s the amount you could likely sell the property for.
- For example, suppose the condominium you own is worth $250,000. You have an annual rental income of $24,000 for the property, which decreased to $13,200 by the costs of owning the property. When you divide $13,200 by $250,000, you get 0.0528.
Multiply by 100 to find your net rental yield. Net rental yield, like gross rental yield, is expressed as a percentage of the value of the property. To get that percentage, take the decimal you got when you divided the annual rental income less costs by the current value of the property and multiply it by 100.
- To continue the example, if you had annual rental income less costs of $13,200 divided by $250,000, you would have a net rental yield of 5.28%. This is considered a relatively low rental yield, but might still be sustainable depending on the location of the property or your reasons for owning it.
- If you’re comparing investment properties to buy, look at the property’s past appreciation and potential to appreciate in the future as well as its rental yield. A high rental yield doesn’t necessarily equate to a good investment if the property is in an undesirable area. Thanks! Helpful 0 Not Helpful 0