According to Nolo, yields between 4 and 10 per cent are reasonable for rental properties. A return on investment of less than 4 per cent is usually not worthwhile (unless there are factors beyond the numbers that make it worth considering), and a return of more than 10 per cent is considered by many to be a good deal. This is a general rule of thumb that people use when evaluating a rental property. If the gross monthly rent (before expenses) is at least 1 per cent of the purchase price, they will look further into the investment.
If not, they will overlook it. Calculating the return on investment (ROI) of a rental property is similar to the capitalisation rate. One difference is that ROI is a more accurate measure that includes more costs, such as the borrowing costs associated with mortgaging a rental property. The capitalisation rate assumes that you bought the house with cash to give you a general idea of the rental yield, whereas the ROI is a more personal measure of how much you will earn.
Rental yield measures the return you generate each year on your investments as a percentage of their value. Investors use rental yield to evaluate the income they earn from their investments and to compare properties. A high rental yield equals higher cash flow. Like the 1 per cent rule, the 2 per cent rule in real estate can help investors measure the relationship between rent and price.
This rule of thumb uses the same idea as the 1 per cent rule. However, the 2 per cent rule suggests that a rental property is a good investment if the rent money each month equals or exceeds 2 per cent of the purchase price. Upon further investigation, you will find that what is a good rental yield is not necessarily a high rental yield. Investors who plan for rental income to cover all expenses all the time may be surprised when not everything goes according to plan.
Some bonds and stocks pay dividends, rental real estate can generate regular passive monthly income through rental payments, and cryptocurrency can generate a yield if lent on an exchange. For housing payments, lenders prefer gross income to be 28 l 33%, depending on other factors. Cash flow is the amount of profit you make each month after collecting all income, paying all operating expenses and setting aside cash for future repairs. Understanding what rental yield is and how it is calculated can help you determine your potential profits and losses on a property you already own or one you are thinking of investing in.
Another thing to consider is whether or not the investment offers the potential for recurring income. It is easy to assume that higher rental yields mean higher returns or higher property values, but this is not always the case. Currently, the best rental yields in the UK are found in Nottingham, which achieves an average rental yield of up to 12%. On the other hand, investors who take the time to analyse the cash flow and accurately calculate the potential return from a rental property can be more successful in the long term.
The total expenses of a rental property include repair costs, taxes, landlord's insurance, vacancy costs and agent's fees. Real estate tax deductions are also one of the reasons why some rental property investors are able to pay very little in taxes while having a lot of money in the bank. If you want to invest in property, it is important to understand what rental yield is and how it works, to ensure a good return.