What are rental yields?
Yields are a very important measure for investment properties as they measure the ratio between the cost of acquiring the asset and the rent that the asset generates.
It is common for media articles to talk about the rental yields on investment property.
How are they calculated?
There are two common rental yields
· Gross Yield
· Net Yield
Gross Yield is simply the annual rental income from the property expressed as a percentage of the capital value (cost) of the property.
For example, if the property costs €300,000 to purchase and generates an annual rental income of €10,000 per anum – the rental yield is 3% This means that each year based on the current numbers the investor would recoup 3% of the purchase price.
The target yield that investors seek from a property is a personal choice and depends on the individual’s investment strategy.
There are two principal investment strategies:
· Cash Flow
· Capital Appreciation
For example, a person may accept a lower rental yield on the basis that the property is generating strong capital appreciation.
Generally investors seek a rental income or yield that will at a minimum meet the interest only repayments on the mortgage, this however has become very difficult in current market conditions.
Net Yield is the yield calculated by using the rental income figure net of expenses.