Written by: Sr. KC Law, Principal & Valuer at Action Real Estate & Valuers
One of the core determinant factor in choosing the right property to invest in for cash flow gains is by calculating the property rental yield. It is used to determine how much return on investment can be made from forking out the price of the property. Why is this important? Because calculating rental yield can tell an investor if the investment on a particular property is worth it, or how expensive that property is with respect to its potential returns. The gross rental yield is simply calculated by the total gross annual rental divided by the price of the property multiplied by 100%. Do bear in mind that the price of the property should also include all other expenses associated with the purchase of the property, i.e. stamp duty, sales and purchase agreement fees, valuation fees, and also renovation costs.
Gross Rental Yield = Annual rent / Price of property x 100 %
In addition to that, if you are making a calculation for a high rise condominium, there would also likely be maintenance fee which is borne by the landlord. Hence to accurately calculate the net rental yield, one should subtract any cost involved with the unit. (for eg. tax, insurance, sinking fund)
Net Rental Yield = Annual rent – costs (eg maintenance fees) / Price of property x 100 %
In view of property prices that have increased over the last 2 years, it is getting harder and harder to find a property with a rental yield that can cover your monthly installment. (sucks, I know!). Most investors would generally set the cut of point of about 5% rental yield. These days, a rental yield of about > or = 3% is already pretty good! If you’d like to find out how to improve your rental yield, read here.
If you have not already noticed, the bottom line is, rental yield is greatly dependent on the price of the property! If you happen to chance upon a property that is below market value and in a fantastic location. What are you still waiting for?
Grab it by its tail before it is gone!!
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About the Author
Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyor Malaysia and Member of Malaysia Institute of Estate Agents.