Investing in rental properties is one of the most popular ways to generate passive income. However, before making any investment, you need to ensure that the potential return on investment is worth it. This is where the concept of rental yield comes into play. Rental yield is the return on investment that is generated by renting out a property.
Calculating potential rental yield can be complex, but it is an essential step in determining the suitability of an investment. It is important to conduct a thorough analysis to ensure that you are investing in a property that will generate the highest possible rental yield. Here are a few steps to help you calculate potential rental yields on a property investment.
1. Determine the expected rental income
The first step in calculating rental yield is determining the expected rental income. This includes looking at the current rental prices in the area. It is advisable to compare prices with similar properties in the same area. You can also look at rental rates on websites such as Zillow or Trulia.
2. Consider additional income streams
Apart from rent, there are other income streams that come with rental properties. These include parking fees, late payment fees, and pet fees among others. You should calculate these additional income streams and add them to the expected rental income.
3. Determine the annual expenses associated with the property
When investing in rental property, there are expenses that come with it. These include property management fees, maintenance and repair fees, property taxes, insurance, and utilities. You should add up all these expenses and deduct them from the expected rental income and additional income streams. This will give you the net income.
4. Calculate the property value
The next step is determining the value of the property. This includes the initial cost of purchasing the property, any repairs that need to be made, and other expenses associated with the investment. You should also consider the resale value of the property in case you plan to sell it in the future.
5. Calculate the rental yield
Now that you have all the required values, you can calculate the potential rental yield. The rental yield is expressed as a percentage of the property value. To calculate the rental yield, divide the net income by the cost of the property. Multiply the result by 100 to get the rental yield percentage.
For example, if a property costs $200,000 and the expected rental income is $20,000, with an additional $2,000 in income streams and $5,000 in annual expenses, the net income would be $17,000. The rental yield would be calculated as follows:
Net income/cost of property x 100 = Rental yield
$17,000/$200,000 x 100 = 8.5%
In conclusion, calculating rental yield is an important step in assessing the potential return on investment in a rental property. As an investor, you need to consider all the components mentioned above to ensure that you get the highest possible rental yield from your investment. Conduct thorough research and seek advice from experts to help you make informed investment decisions.