Rental Yield Is Important To Analyse Your Real Estate Investments
When you invest in real estate assets, it is important to look at capital appreciation. The market price of a house may rise significantly in a few years but capital appreciation is not the only factor that matters. Rental yield, which is expressed in percentage, of a property matters, too. It is calculated by dividing the annual rent by the value of the property and multiplying this figure by 100. Rental yield matters, because a building should generate revenues for you even when you are not occupying it. If the rental yield is high, it means that investing in the property was a good idea and vice versa.
Rental yield may also indicate how much the price of a house may rise in the future. This is because if the value of a property is likely to rise significantly in the near future, people may be willing to pay a higher rent. But to find out whether this applies to your property, you should look at both gross rental yield and net rental yield.
While gross rental yield is the annual rent divided by the value of the property, and multiplying this figure by 100, net rental yield is calculated by dividing net rental income by the value of the property, and multiplying this figure by 100.
Net rental income will be lower than annual rents, because you deduct the cost of insurance, property maintenance, property tax and other costs of holding on to a property. Without knowing the net rental yield, it is difficult to say how good an investment a real estate asset is.
There is always an element of risk involved in real estate assets. When the risk is high, returns tend to be high, too. Looking at the rental yield would help you to shield yourself from the risk to some degree. If the rental yield is high enough, the property may fetch you decent returns even if you do not intend to sell it if the market stops doing well.
Looking at rental yield is a good way to figure out whether property prices are likely to appreciate or not. For example, if a Metro line is likely to soon come up in a certain neighbourhood, renters are more likely to relocate there earlier than buyers. They are not risking as much. So, rents usually rise faster than property prices. When real estate investors and home buyers see that rents are rising, they start buying. So, rental yields matter when buying a property for investment.