How to Calculate Rental Yield
When people think about renting out their premises what comes to their mind is the optimum situation wherein the rental yield will be higher than the mortgage payment
The following formula shows how to calculate rental yield accurately by taking into all costs that are often overlooked
Rental yield in %=
(Net Annual Rent Collected / Total Cost of Property) x 100 %
(Net Annual Rent Collected = Total Rent Collected - maintenance cost, property tax, property agent cost, income tax, vacant cost etc)
( Total Cost of Property = Price of Property + Stamp Duty + Legal fees + Renovation + furnishing)
Example (Assuming there is no mortgage):
Purchase price of property: - $600,000 (inclusive of all costs)
You rent it for: - $2000/month and
Your monthly maintenance payable: - is $200,
Agent fee is 1 month's rent which is: - $2000(one time cost)
Repay furnishing cost is: - $500 per year
(For example :- If you spend $5k on furnishing and expect it to last for 10 Years so amortized(repayable) cost = $5000 / 10 years which comes to $500),
Property tax (10% of annual value {annual value =monthly rent x12x10% property tax})
which is $2400,
And assuming other costs to be negligible, we have:
Net Annual Rent Collected in $ = Rent per month x 12 months-(monthly maintenance x 12 months + Agent fee + Repayable Furnishing cost + property tax ($2400)
Net Annual Rent collected in this case is = $2000x12 - ($200x12 + $2000 + $500 +$2400) = $16,700
Rental Yield = (Net Annual Rent Collected / Purchase price of the property) x 100
Rental Yield in this case = ($16,700 / $600,000) x 100 = 2.78%
Falls in the percentage = 2.78% ~ 3%
If the mortgage rate is 3%, then rental yield will just be about enough to pay for your mortgage interest (only).
