Definition: What is net rental yield?
Net Rental Yield (NRY) is a crucial metric for real estate investors to understand the return on their investment properties. It’s a percentage indicator that shows how much cash your rental property generates annually after deducting expenses relative to the property’s value.
To calculate the Net Rental Yield (NRY), you first need to determine your property’s annual net rental income. This is the total amount earned from renting the property minus all necessary expenses such as insurance, taxes, repairs, and management fees. Once you have this value, divide it by the property’s value or purchase price and multiply by 100 to get the Net Rental Yield percentage.
It is important to note that having a high gross rental yield does not always translate to a desirable NRY. If operating expenses for a property are high, it can significantly reduce the net rental yield. Risk-averse investors may prefer newer homes in better neighborhoods with a lower net yield, as they tend to have lower operating expenses.
Origin of the Metric
The Net Rental Yield is a crucial metric used to evaluate the profitability of investment properties in real estate. Initially, investors relied on gross rental income to analyze rental properties, but this practice was limited.
Net rental yield, a comprehensive metric considering income and expenses, entered the picture as a more accurate measure. Investors can make informed decisions and optimize their investments by understanding the importance and origin of net rental yield.
Equivalents: When discussing net rental yield, there are some similar phrases you might come across, such as:
- Earnings from rent
- Lease income
- Lease revenue
- Income from rental property
These terms all mean the same thing so you can use them interchangeably.
Using Net Rental Yield in Short-Term Rentals
When you want to apply the concept of net rental yield, you’ll often use it to evaluate the potential return of a real estate investment. Investors mostly use it to compare different properties and make informed decisions on which would generate better returns.
By exercising this key metric, you can assess your investment’s efficiency, considering property expenses. This helps you understand if the investment is worth your time and money. Net rental yield can also help you set rent increases or property improvement benchmarks.
Start by confirming your property’s income potential to calculate the net rental yield. For example, if you rent a property for $2,400 a month and it’s vacant 5% of the year, your annual cash-in is $27,360. Next, identify any losses, such as annual insurance and taxes, and budget for potential repairs.
Regularly monitoring the net rental yield allows you to track your investment’s performance and make any necessary adjustments. This might include refinancing a mortgage, negotiating lower property management fees, or reducing vacancy rates. Using net rental yield ultimately helps you optimize your property’s earnings potential.
Examples of Calculating Net Rental Yield
Let’s look at some examples representing net rental yield calculations in real estate investment.
Suppose you’re considering buying a duplex for $200,000. The property generates a monthly rental income of $2,000 from both units. Your annual rental income is thus $24,000. Now, assume your annual property expenses are $4,000. To calculate the net rental yield, follow these steps:
- Subtract yearly expenses from the annual rental income: $24,000 – $4,000 = $20,000
- Divide the net rental income by the property value and multiply by 100 to get the percentage: ($20,000 / $200,000) x 100 = 10%.
In this case, your net rental yield is 10%. This may typify a profitable investment, as it represents the annual return on the investment without considering mortgage payments.
Let’s take another example. Say you purchase a condo for $150,000 with a monthly rental income of $1,500. Your annual rental income amounts to $18,000. You have an annual property expenses of $5,000. Here’s how you’d compute the net rental yield:
- Subtract annual expenses from the annual rental income: $18,000 – $5,000 = $13,000
- Divide the net rental income by the property value and multiply by 100 to get the percentage: ($13,000 / $150,000) x 100 = 8.67%.
In this scenario, your net rental yield is 8.67%. This model demonstrates how net rental yield can help you evaluate the attractiveness of your investment based on the returns it generates.
Comparing these percentages can provide valuable information on which property might align better with your investment goals.
Gross Rental Yield: This term represents the percentage of annual rental income compared to the property’s fair market value. It’s calculated by dividing the annual rental income by the property’s value, then multiplying the result by 100.
Net Operating Income (NOI): This figure represents the annual rental income a property generates after deducting operating expenses such as insurance, taxes, repairs, and property management fees. NOI excludes costs like mortgage interest, capital expenses, and depreciation.
When evaluating a rental property investment, comparing gross rental yield and net rental yield can be a helpful way to gauge potential earnings.