Yield is a measure of profit or loss from an investment, expressed as a percentage of the initial cash outlay. The yield on rental property is the annual net income of that property divided by its purchase price. Although you can calculate yield for smaller time periods, a year is the minimum for a meaningful figure. Landlord expenses tend to spike a few times per year, due to repairs or legal fees that aren’t part of the normal rental property expenses.
1. Calculate the total income for the year from that rental property. This is usually the total rent payments, but may also include application fees, payments for repairs or improvements, and any portions you kept from a security deposit.
2. Total the mortgage, insurance and tax payments for the rental property. Often, these 3 payments are all part of the same draft for your loan.
- Your monthly payments for mortgage, insurance and tax come to $1,000 per month, which is a total of $12,000 annually.
- You spend $1,100 on new paint and minor repairs when the first tenants move out, plus $250 in advertising and background checks for the new tenants.
- Your total annual expenses for the rental property is (12,000 + 1,100 = 250 =) $13,350.
- Your net profit on the rental property is (15,720 – 13,350=) $2,370.
- If the property originally cost you $180,000, your annual yield is (2,370/180,000 =0.013*100=) 1.3 percent.
- Note that this figure does not include accumulating equity in the property itself. Buying real estate with other people’s money is one of the chief benefits of investing in rental property.
- If you spend a lot of your own time working on the house or with the tenants, you might want to include the “cost” of your own labor. This isn’t actual cash, and will be a problem for tax accounting, but it can give you a realistic idea of how much a rental property “costs” you.
Things You’ll Need
- Bank statements, credit card statements and all other financial records for the property.
- Calculator or spreadsheet program. Some money software can also do this calculation for you.