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What Is Gross Rental Yield?

5 min read

What Is Gross Rental Yield?

Gross rental yield, along with other factors, can help you compare how good an investment property is in generating rent.

An investment’s gross yield is simply its gross profit (before expenses and taxes) expressed as a percentage of the purchase price. For example, a $10,000 investment that produces $1,000 in gross profit has a 10% gross yield.

Explaining gross rental yield

A rental property’s gross yield is referred to as gross rental yield. It’s simply a percentage of the property’s market value divided by the rent received over the course of a year. A gross rental yield of 12% would be achieved by a rental property with a market value of $100,000 that earns $12,000 in rental income each year.

The gross rental yield does not reflect the real earnings (if any) generated by an investment property. It is solely dependent on rental income over the course of a year. Property taxes, management fees, and other running costs are not included. The net rental yield would be this. In fact, a property can have a high gross rental yield while yet generating poor cash flow for its owner.

As a result, gross rental yield might be useful for comparing two investment properties quickly or narrowing down a list of potential investments. However, it isn’t a good indicator of a property’s profitability on its own.

In addition, the gross rent multiplier, which is a close cousin of gross yield, is another important indicator used to evaluate real estate investments. The gross rent multiplier is the sale price of a property divided by the monthly (or annual) rent. Investors frequently have a maximum gross rent multiplier in mind for a rental property, such as fewer than 100 times the monthly rent.

Before we go any further, let’s go over some terms. In Australia and a few other nations, the term “gross rental yield” is more generally used than in the United States. If you’re a real estate investor in the United States, you’ve probably heard the term “gross yield,” which means the same thing.

Why would you want to use gross rental yield?

In real estate investing, gross rental yield can be advantageous in a few situations:

  • Figuring out how much rent to charge: Let’s imagine you’ve recently purchased an investment property with no current tenants and are wondering how much rent you should charge. You can calculate a suitable asking rent by multiplying the average gross rental yield in your market by the property’s valuation (a local real estate agent can assist you with this).
  • Evaluating two or more potential investment properties: The concept of gross rental yield might assist a property investor in narrowing down the market’s inventory to a small number of attractive options. You can divide each property’s expected rent by its listing price and use the gross rental yields for a quick way to select the top investment properties worth a deeper look by applying a specified cutoff (say, 10% or 12%).

Calculating gross rental yield

Using these three procedures, you can easily determine gross rental yield:

  1. To calculate the property’s annual gross rental income, multiply the monthly rental income by 12.
  2. Divide the annual gross income by the property’s market value.
  3. To convert the value to a percentage, multiply it by 100.

Let’s imagine you own a single-family rental home that currently generates $1,150 per month in rent. The house was recently valued at $120,000.

To determine the property’s annual gross income of $13,800, multiply the $1,150 monthly rent by 12. Next, divide this by the property’s market value of $120,000, yielding a result of 0.115. When you multiply this number by 100, you get a gross rental yield of 11.5 percent.

How the property’s value is determined is one aspect of the calculating technique that can differ. Some investors utilize a current value estimate that is based on actual data (like an appraisal or analysis of comparable sales in the area). The listing price or estimated sale price of each property can be used to determine gross rental yield when evaluating possible investment properties. If you recently purchased an investment property, use the purchase price as the market value.

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