Looking to make the best property investment? This handy calculation will help you make a decision…

Julie Brownlee, Fsp Invest, 14 Aug. 2014

Tags: rental yield, property, property investment, investing in property, what is rental yield, property investor



When it comes to investing in property to rent out, you want to ensure you’re going to see a good return on your money.

If you pay too much for a property, you won’t see a return on your investment that makes the venture worthwhile.

That’s where a property’s rental yield comes in. Not only will this calculation help you weigh up an investment, but it can give you a good idea of the risk you’re taking on.

Read on to uncover what you need to know about rental yield…



What is rental yield?


If you’re a budding property investor, you need to know about rental yield.

Rental yield is very useful for two main reasons:

  • Firstly, it helps you decide how much to pay for a property; and
  • Secondly, it helps you set a selling price for a property.

To calculate a property’s rental yield, divide a property’s gross annual rental income (deducting no expenses from the rental income) by its market value.

The rental yield gives you an indication of how the rent you’ll receive from a property weighs up with its current price.


How to use rental yield


You can use the rental yield to compare a property with other similar properties. Or you can compare it to the yield of other investments you may have, like shares.

The rental yield inversely relates to risk, as is the case with most yields.

For example, a prime office in Sandton with a good tenant on a long-term rental agreement will have a lower yield than a warehouse in a remote location that you’d struggle to find tenants for.

Not only that, a high rental yield can suggest a property is undervalued. If this happens, increased interest by property investors will push prices up and bring yields down.

On the other hand, if rental yields are very low, it can suggest a property is overvalued.

So there you have it, a handy calculation to help you make a decision when making a property investment.

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