How to calculate rental yield |
Most of the 1990's, The Standard & Poors Index posted earning yields of 5% to 6% on average. At the same time, the dividend yields of the S & P were only around 2% or less. Since dividend paying stocks tend to be much less volatile, the gains on the appreciation side would not normally be a significant factor. Now let's look at some of the ways that a rental property investment can generate returns and throw off cash:
•Start by only choosing properties with rental yields of 6% or better.
•Rental properties normally appreciate in value with inflation.
•Rents usually increase with inflation, while mortgage payments on the property remain stable.
•Using leverage, while being careful to buy properties with good rental yields provides greater returns.
•Amortization, or paying down the loan, frees up more investment resources to increase leverage.
The beginning of a successful rental property investment strategy is an accurate estimate of rental yield for the prospective property. Here's an example calculation:
•Monthly Rental Amount $2,400.00
•Percent of Year UnOccupied 5%
•Take out for Vacancy for Annual Cash In of $27,360.00
•Property Acquisition Cost $300,000.00
•Less Down Payment - Cash In $60,000.00
•Amount of the loan $240,000.00
•Payment Monthly Pricipal/Interest $1,556.64
•Annual Insurance Cost $1,200.00
•Annual Taxes $1,400.00
•Annual Repairs Budget $600.00
•Percent of Rent Mgmt Fee of 6%
•These expenses total to Annual Cash Out of $23,521.28
•Income of $27,360 minus cost of $23,521 = $3839 cash return over cash out
•$3839 divided by cash investment of $60,000 = Rental Yield of 6.4%
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