Yield is defined as the return on an investment and is measured relative to the initial cost. Calculating the yield on a rental property takes into account the annual revenue generated by the property and its purchase cost. While you can consider revenue for smaller periods as well, taking a year’s revenue is recommended because there are additional expenses and costs you may face in the course of a year.
Calculate rental property’s annual income
Adding up the rental property’s revenue is simple enough. You will need to take all the rent payments into account, along with any application fees and deposits you retain. For instance, if you rented out your property for 3 months at $1600, then the tenant left, and you rented it out again after 2 months at $1400, for the rest of the year. You will calculate the revenue as:
- $1600 x 3 = $4800 + ($1400 x 7) = $14,600
Then you can add any other fees and deposits you returned. For instance, if you take an application fee of $100 per tenant, and a security deposit of $1200, your total revenue will be:
- $14,600 + ($100 x 2) + $1200 = $16,000
Add up the insurance, mortgage and tax payments you make on the rental property
Your expenses for the rental property include the payments you make on it. In order to calculate the yield, you will need to add up all payments. For example, if your mortgage, insurance and tax payments amount to $1000 a month, you will be paying a total of $12,000 in payments annually.
Calculate other expenses related to the property
If you carry out any repairs or maintenance work on the property, the cost for that will also be considered in your total expenses. For example:
You spent $1000 on fixing up the property after the first tenant left and spent another $200 on advertising your property for a new tenant.
Your total expenses will add up to: $12,000 + $1,200 = $13,200
Divide your total annual profit by the total investment in the property
Now you need to find out the total annual profit, which in this case will equal:
- $16,000 – $13,200 = $2,800
Divide your annual profit by the total cost of the rental property. If you bought the property for $175,000, your yield will equal:
- 2,800/175,000 = 0.016 x 100 = 1.6%.