For every investor, it is imperative to know how to tell if your investment property is turning a profit, but you don’t have to wait until you have tenants through the door in order to see if you’re likely to make money.
Calculating a property’s rental yield is a vital part of investing, and can help landlords set themselves up for success. Whether you’re an experienced hand at real estate investing or are considering purchasing your very first rental, there are some key things to understand about this metric.
What is rental yield?
There are two primary types of ways investors can make money through investment – capital growth or rental yield.
Capital growth (sometimes called capital appreciation) refers to the increase in value of an asset – in this case property – over time. For an investor interesting in flipping property, this metric is likely to be more important. A rental yield on the other hand shows you how much income your property will generate each year, as a percentage of the property’s value. To work out your possible rental yield, you first take the month rental price and minus monthly running costs and expenses such as costs of property management or insurance. Then, you place that figure against the overall price of the property to determine a figure known as the rental yield. This lets you see how much money you could expect to make a month from your investment, so that you can compare properties and see where and how you’re likely to make the most money.
Why is a rental yield calculator important when considering investing?
The goals of each investor vary, but for those who are aiming to make money through buy-to-let rentals as opposed to flipping property, working out the rental yield is important.
Firstly, it is an indicator of whether the buy to let property in question is in fact a good investment. The last thing an investor wants is to purchase a property and spend the time, money and effort associated with getting it in shape for tenants before going through the rest of the letting process – only to find they are just about breaking even! You don’t want to cover the cost of mortgage payments (or even worse, fail to make money), but want to have money left in your pocket each month after all payments are said and done, which is why rental yields can be so helpful.
If your math skills leave a little to be desired or you are looking at comparing a number of different properties, using an online calculator can save you time and help you store all the results in one spreadsheet for easy comparing.
Of course, a rental yield alone is not an indicator of a sound investment – there are many other considerations to think about. Speaking with other experienced investors or a property management team specialising in your local area can help answer questions, and provide you with some more guidance beyond the numbers when it comes to choosing the perfect investment property.