How To Measure (And Use!) Rental Yield

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I‘ve been intending to write about rental yield calculations in the Homebuyer’s 101 Guide, but here’s the quick-and-dirty version for those who have been wondering about how to derive gross and net yields, and more importantly how to use those numbers.

Yield is the “magic figure” that many investors use as a screening criteria; now with the average yield going down the dumps the shortlist of properties deemed to be invest-able is getting shorter by the day. More on this later.

And so we have received this very timely email following last Saturday’s GoodPlace Digest (click here for the archives) –

Yield Calculation

What’s “yield”, and why is it important?

So Paul, here’s your answer. 🙂

How To Calculate Yield?

Pretty simple, actually. Annual Gross Rental Yield is defined as follows –

Definition of gross yield

Here the Total Purchase Price is the summation of the actual price AND the corresponding expenses, which typically includes stamp duty, sales / purchase agreement fees and other transactional fees. Additionally, we would also include renovation and repairs into the Total Purchase Price as well (some argue otherwise, but we reckon since the cost is essentially “sunk” it should be factored in).

Now if there are ongoing costs (or in the case of high rises there will be maintenance costs that are borne by the landlord for example) then it will make sense to calculate the Net Yield which is defined as follows –

How to calculate net yield

Some of these annual expenses may also include: agent fees, repairs, property taxes, insurance.

Why Is Yield Important?

If you’re familiar with stocks, then think of yield1 as the “price to earnings ratio” of properties – it indicates how “expensive” a property is – in the context of its returns.

Now with the average purchasing price on the uptrend for the past 24-36 months, rental has been struggling to catch up, resulting in suppressed yield. This is especially so in areas where there’s oversupply, particularly in Mont Kiara and also KLCC.

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Properties in Mont Kiara suffer from suppressed yield with flat or dipping rental rates

Historically, the “cut off” point for many investors are 5%, and in the present many would be happy with 3% or more. As such, the days when one can entirely “subsidize” a loan with rental are practically over. 🙂

In Summary…

  • The “yield” of a property is an indication of how “expensive” the property is in the context of the returns that it provides.
  • Typically speaking, properties with higher yield will give you higher returns on your investment.
  • Net yield is a more accurate measure than the gross yield because it incorporates the ongoing expenses to maintain the property.
  • In areas where there has been high capital appreciation, yield takes a beating.
  • If you are investing in areas with super low yield, the possibility of market correction is very real.

Questions? Comments? Leave your feedback below.

  1. Strictly speaking, the inverse of yield
About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Comments

  1. I would consider current market value to calculate yield instead of the purchase price, in the case of property purchase 5~10years ago.

  2. Would the day where rental would be able to subsidize loan comes again? yield couldn’t stay low forever (theoritically speaking) so either price has to come down or rental have to go up

  3. should the loan interest to be included in the property cost as well?

  4. Thanks for your article – it is both informative and thought provoking. My question is if Mont Kiara & the KLCC area has such low rental yields …

    1. why are properties there so expensive and developers rushing to build more?

    2. where can an investor with a RM1M budget invest in a good condo with better rental yield and also prospect for appreciation?

    Thank you.

  5. Wish to know is there any method to value properties adjacent to playground/landscape garden.. . Will such properties have higher value compare to intermediate houses… If yes, what will be the percentage and why…

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