Are you thinking of purchasing your first rental property? If you’re new to the world of real estate, you may notice that there are many terms within the field, some of which can be confusing.
However, it is important to remain committed to learning about everything that comes along with owning a rental home, and this includes familiarizing yourself with the gross yield of your rental property.
As an investor in real estate, you know that owning rental property can be one of the most lucrative investments that you can make. However, in order to truly maximize the return on your new investment, you’ll need to have a full understanding of what exactly allows a property to generate a profit in the long run.
Part of that equation is knowing your gross yield. In this blog post, we will walk you through everything you need to know about your property’s gross yield including why it’s important, how to calculate it, when to use it, and more.
What Is Gross Yield?
To put it simply, gross yield refers to the percentage of profit that you earn from your rental property before you go to deduct your expenses. This means that it can serve as a reliable way to measure the return on your investment.
Your gross yield will be measured as a percentage and generally, the higher your percentage is, the better. This is because a higher percentage indicates that you have a higher amount of income rolling in from your investment.
However, it is important to note that your gross yield will not always be a reliable way to determine whether or not an investment will be worth it in the long run. There are many other factors beyond your gross yield that new investors must take into account before committing to a rental property.
Unfortunately, your gross yield calculation will not include the variety of expenses that you will inevitably face as a rental property owner. These expenses include your tax rates, operating costs, maintenance and repairs, advertising, insurance rates, and more.
Since none of these costs are taken into account when calculating your gross yield, you may not want to allow this percentage to be the only influence when deciding on whether a rental home is worth the long-term investment.
For example, if you have a property that allows you to charge a high amount of rent, but you are also faced with high maintenance costs, then your overall profit may not be as high as you were initially expecting.
While it may not be the best depiction of how profitable an investment will be in the long run, there are still many benefits of knowing how to calculate a property’s gross yield.
How Can I Calculate Gross Yield?
Now that you know what a gross yield is, let’s talk about how you can calculate it.
It’s important to note that this calculation can be used for any asset you have that generates income, meaning the ability to determine a gross yield can be helpful across many industries. Today, however, we will be focusing on how it applies to real estate investments.
In order to accurately calculate the gross yield of your rental property, you will need two different numbers: your gross annual rent income (before any deductions or costs) and the total value of the property. Then, you will need to take your income and divide it by the value of the property.
Your property’s value includes the purchase price, any closing fees, and the cost of any renovations or upgrades that you have done to the home prior to renting it out.
For example, if you own a single-family home that generates a gross rental income of $6,000 per year, and the market value of the home is $100,000 total, then your gross yield calculation will be the following equation:
$6,000 gross rent / $100,000 market value = .06 or 6%
One important aspect of your gross yield to note is that this number will fluctuate over time. Your gross yield can go up or down in the next year, or even the next few months.
What Makes Gross Yield Fluctuate?
When the general economy starts to experience a downturn, some property owners who are not as experienced or prepared for the market cycle may panic and decide to sell their property. This will cause property prices to lower across the market. When this happens, gross yields can increase if the cost of rent remains the same.
Alternatively, the opposite can happen when housing is in particularly short supply and high demand. In this case, gross yields may decrease for a period of time. Then, they will typically adjust back to their normal rate as rent prices increase.
The bottom line is that as a rental property investor, you will need to be prepared for your gross yield to fluctuate over time, as this is a natural occurrence in the real estate industry.
How Can I Increase My Gross Yield?
Let’s say you want to increase your gross yield percentage. There are a few ways that you can achieve this over time. Here are some tips and tricks that we recommend doing if this is your goal:
- Keep a close eye on the rental market in your area to ensure that you are not under-valuing the cost of rent for your property.
- Add value to your rental property by doing some upgrades and renovations. If you choose to take this route, make sure that you raise your rent price accordingly.
- If possible, make your rental property pet friendly. Depending on where your rental property is located and your local state laws, this may allow you to collect additional fees from tenants, such as pet rent.
- Implement a thorough tenant screening process in order to minimize the possibility of evictions, property damage and vacancies.
When to Use Gross Yield
Gross yield is a fairly simple calculation that you can do in your head, on the back of a napkin, or with the calculator on your smartphone. It can be a quick and easy way to compare different rental properties’ worth as long-term investments, or even to compare different locations.
It can also help you to determine what the best rental costs will be for your property.
What Is a Good Gross Yield? Bottom Line
So, when it comes to your gross yield, what exactly should you be aiming for as a new investor? In an ideal situation, your gross yield would sit at around the seven or eight percent mark. However, sometimes it can get a bit more complicated than that, as it can all depend on the expenses and risks associated with the property in the long run.
At the end of the day, while it may not give you the entire picture, knowing the gross yield of a rental property is a great way to understand its potential for generating a profit, and this simple calculation may even help you choose your next successful investment.
