Investing in real estate through rental properties is a way to generate continuous income for the owner. Many people are interested in this field and want to know what kind of return on investment they can expect. Therefore, YOOHOO will help you understand "Yield" and how to calculate rental returns that you should know.
Yield or Rental Yield is the calculation of the return rate from renting out a property. There are three different calculation methods, each depending on the factors used in the calculation.
1. Gross Rental Yield: This method calculates the initial rental return rate and is suitable when the property has no associated costs and was not purchased with a loan, as this method does not take financial costs or expenses into account.
2. Net Rental Yield: This method calculates the net rental return rate, which is suitable when the property has associated other costs such as common fees, but was not purchased with a loan, as it includes expenses in the calculation but excludes financial costs.
3. Cash on Cash Rental Yield: This method calculates the rental return rate from cash flow over a year, suitable for properties purchased with a loan and having maintenance costs, as it includes both factors to calculate a more realistic rental return rate.
Calculation of Rental Yield
Method 1: Gross Rental Yield (Initial Rental Return Rate)**
This method is simple because it only uses the expected annual rental income and the purchase price of the property to calculate the return rate, without including financial costs or other expenses.
Gross Rental Yield = (Expected Annual Rental Income ÷ Purchase Price of the Property) x 100
Example: If you buy a house for 1,000,000 Baht and rent it out for 8,000 Baht per month, assuming the tenant stays for the entire year, the expected annual rental income would be 96,000 Baht (8,000 Baht x 12 months). Therefore, the rental return rate would be 9.6% per year.
Rental Return Rate = (96,000 ÷ 1,000,000) x 100 = 9.6% per year
However, this method may result in a higher return rate than in reality, as tenants may not stay for the entire lease term or there may be months without tenants. Therefore, it's advisable to adjust the number of months with tenants to 9-11 months for a more realistic rental return rate.
Method 2: Net Rental Yield (Net Rental Return Rate)
This method includes various expenses incurred after purchasing the property, such as regular maintenance fees paid to the project management entity. Although these expenses may seem small monthly, they add up over a year. This method includes these costs in the calculation by subtracting the total annual expenses from the expected annual rental income to get the net rental income, and then calculating the return rate using the formula below.
Net Rental Yield = (Net Expected Annual Rental Income* ÷ Purchase Price of the Property) x 100
Net Expected Annual Rental Income = Expected Annual Rental Income – Total Annual Expenses
Example: If an investor buys a house for 1,000,000 Baht and rents it out for 8,000 Baht per month, expecting to rent it for 10 months per year, the expected annual rental income would be 80,000 Baht. Meanwhile, the investor must pay 2,000 Baht per month in maintenance fees, totaling 24,000 Baht per year.
Net Expected Annual Rental Income = (80,000 – 24,000) = 56,000 Baht
Net Rental Return Rate = (56,000 ÷ 1,000,000) x 100 = 5.6% per year
Method 3: Cash on Cash Rental Yield (Cash Return Rate)
This method considers cash inflows and outflows over a year, determining how much cash is left after deducting all expenses (Equity Dividend Rate). It subtracts the total annual expenses and the annual mortgage payments from the expected annual rental income. The down payment, reservation fee, and decoration costs, including appliances and conveniences purchased with actual cash, are also included in the calculation.
Cash on Cash Rental Yield = (Net Expected Annual Rental Income* – Annual Mortgage Payments) ÷ (Reservation Fee + Down Payment + Decoration Costs) x 100
Example: If an investor rents out a property for 25,000 Baht per month, expecting 10 months of rental income, the expected annual rental income would be 250,000 Baht. The property incurs a 5,000 Baht per month maintenance fee, totaling 60,000 Baht per year. Additionally, the investor must pay a 10,000 Baht per month mortgage, totaling 120,000 Baht per year. Initial expenses include a 7,000 Baht reservation fee, a 250,000 Baht down payment, and 120,000 Baht in decoration costs.
Net Expected Annual Rental Income = (250,000 – 60,000) = 19,000 Baht
Cash Return Rate = (190,000 – 120,000) / (7,000 + 250,000 + 120,000) = 18.57% per year
The average rental yield in Bangkok in the third quarter of 2024 was 6.27%. Compared to the fourth quarter of last year, which was 5.79%, there has been growth in the real estate rental market. Therefore, in addition to the factors mentioned above, the location of the property is also crucial. Choosing a property near public transportation, main roads, schools, or even shopping malls or other conveniences will increase the rental return rate.
