What’s the secret to successful real estate investment? Many of the richest individuals in the world have made their fortunes in real estate. And even if you aren’t aiming to make millions of dollars, you wouldn’t invest in real estate if you weren’t hoping to make a profit. One of the most important concepts to understand for property investment success? Rental yield!
What is Rental Yield?
Simply put, rental yield is a measure of your return on investment. It is calculated by looking at the profit your property generates as a percentage of its value. Obviously, the more rental income a property generates the better. However, to really understand how much of that profit is ending up in your pocket over the long run, you must take into consideration how much you paid (or are still paying in the form of a mortgage) for the property.
Knowing your rental yield on a given property will help you judge how successful your investment has been.
Calculating Rental Yield
There are two different ways to calculate your rental yield. You can either calculate your gross rental yield or your net rental yield.
To calculate your gross rental yield, you take your annual rental income and divide this number by your property’s price then multiply by 100 to get a percentage. When calculating your property’s price make sure to include the purchase price along with any closing or renovation costs.
For example, let’s say you paid a total of $250,000 for your property and it rents for $1,000 per month. Your annual rental income would be $12,000. If you divide $12,000 by $250,000 and multiply by 100 you would get 4.8%.
Most property owners find, though, that gross rental yield isn’t the most accurate indicator of return on investment. This is because this measure leaves out an important factor – expenses. Any experienced landlord knows that managing and maintaining a rental property costs money, and this gross measurement does not take this into account.
Net rental yield is calculated the same way, but before you divide you subtract operating expenses from your annual rental income. These expenses can include everything from repairs, loan fees, insurance costs, utilities, and vacancy costs.
Looking at the same example from above, let’s say that as a landlord you end up spending $2,000 per year on operating costs. Subtracting $2,000 from the $12,000 annual rental income leaves you with $10,000. When we divide this by the price of the property and multiply by 100, the net rental yield is 4%.
What is a Good Rental Yield?
Now that you know how to calculate the rental yield for a given property, you’re probably left wondering what a “good” rental yield. What percentage should you be aiming for to ensure you are getting a good return on investment?
There is no perfect right answer to this question. However, atypical net rental yield for residential properties in Panama these days is around 4 to 4.5% for one-off apartments (condos) and between 5 to 6 percent for multifamily.
There is a risk associated with using rental yield as the sole measure of a property’s profitability. There are many factors that determine how profitable rental property is, and rental yield is only one of them. It’s also worth considering how rentable a given property might be in the future, taking into account the neighborhood and housing trends. While it can only be based on educated speculation, future return on investment is often more important than the current one.
How to Improve Rental Yield
The good news is if you’re less than satisfied with your rental yield, there are ways to improve it. Essentially there are only two means by which you can improve this measure. You either need to increase your rental income or decrease the cost of the property.
As you can imagine, the former is much easier to accomplish than the latter. That said, if you refinance your loan on an investment property with a lower interest rate, thus lowering the total cost to you, it is possible to improve your rental yield by this means.
What is more common, though, is increasing your rental profit. Raising the rent of your investment properties will increase your rental income. Obviously, there is a limit to how much you can do this. You want to make sure the rent on your properties is high enough to generate an income but not so high that you drive away tenants. Nothing will eat into your return as much as a property that sits vacant month after month.
Choosing the Right Investment Property
So how do you choose a rental property that will have a good rental yield? There are plenty of factors to consider when looking for a solid investment property.
For one, you want to think about finding units in areas that are in high demand with renters. Here, it helps to know your community. Properties near universities or financial districts can often be prime areas for high rental demand.
It’s also worth staying up-to-date with new development plans or trends that may affect the rentability of an area in the near future. Plans to add a new public park or shopping mall to a neighborhood will likely increase demand for renters. An upward trend in crime in an area will likely have the opposite effect.
Additionally, you’ll want to make sure that you’re getting a good price for any investment property you’re considering. Do your due diligence and shop around, comparing prices on similar units in the area. It’s also a good idea to find out what similar units in the same neighborhood typically rent for. This can help you estimate what your rental yield might be before even putting an offer on a property.
Using Property Management
This is one area where it’s a good idea to work with a property management company. Having a trustworthy property management company when dealing with rental properties means your property is maintained, your utilities are checked to ensure they are working correctly, and your property is retaining it’s highest value for long-term appreciation.
A good property management company should protect the future value of your property and ensure that you are able to generate the highest returns in the future either through increasing rents or a higher sale value if you ever decide to sell.
Be an informed investor and think about this the next time you’re eyeing a prospective purchase and analyzing your rental yield. Having a solid understanding of rental yield and can help you be a more savvy investor and working with a property management company such as Panama Equity can help you to bring in higher returns.
Luckily, you also have the perfect resource to start your investment property search right here. Our listings are easy to search, navigate, and compare. So what are you waiting for? With just a few clicks, you can be on your way to finding a great investment property today.