Using gross yield for real estate analysis can help you decide which opportunities to pursue and how to sustainably and profitably scale your portfolio. The right property will allow you to generate steady rental income profits and achieve a positive ROI.
While you can never be 100% sure that a particular property is going to generate the income you are expecting, there are financial metrics that can help you judge the potential profitability. One of these which is commonly used is the gross yield calculation as it lets you easily compare properties with different values and rental returns.
What is gross yield in real estate?
Gross yield, in real estate terms, is the total amount of revenue your property generates before taxes or expenses are taken into account. It is measured as a percentage and generally speaking, the higher the percentage, the better, as this equates to more cash flowing in.
Do be aware, however, that a high gross yield is not a hard and fast guarantee that an investment is worth it, as there are many other factors involved.
The gross yield calculation does not take operating expenses, taxes, maintenance, or insurance costs into account, meaning it is not the same as net yield (the actual profit). A property could command high rent but if maintenance costs are also high, the actual profit may not amount to much. Nevertheless, gross yield is a quick and easy back-of-the-napkin calculation you can use to help you compare properties.
As well as being used as a comparison tool between two or more properties, gross yield can also be used to help you determine how much rent to charge a tenant (as long as you know what the average gross rental yield is in the market you are looking at).
How to calculate gross yield in real estate
To measure gross yield, real estate investors will need two numbers. The first is the gross annual rent, which is the total amount of rent collected from tenants over a year. The second is the market value of the property, which can be found on the property listing, by asking the real estate agent, or by estimating it based on other similar properties for sale in the area.
The gross annual rent of a property should be divided by the current market value. This number is then multiplied by 100 to get to the percentage value.
Gross Yield = Gross Annual Rent / Market Value
Example:
Gross Annual Rent: $24,000
Market Value: $300,000
Gross Yield: $24,000/$300,000 = 0.08 x 100 = 8%
In terms of what constitutes a ‘good’ gross yield in real estate, anything between 7-8% is considered ideal. A gross yield of 8% means that 8% of the cost of the property will be recouped in rent every year (before expenses).
How to increase gross yield
If you already own a rental property with a low gross yield, it is a good idea to try and increase this where you can. A few ways to increase cash flow and rental yield are:
- Monitor and review the local market frequently to ensure your rent is not below market
- Add value to the property (and subsequently increase rent) through renovations
- Allow pets and charge pet fees or pet rent to generate additional income
- Screen tenants thoroughly to reduce vacancies and evictions
Advantages and disadvantages of gross yield
No financial metric is entirely reliable but this does not mean that they shouldn’t be used. Gross yield does have some limitations but is also useful when used in the right context.
Advantages
- Quick and easy calculation
- A great tool to compare more than one property
- Can be used to help you set rent payment amounts
Disadvantages
- Not the same as actual profits
- Doesn’t take expenses or taxes into account
Gross yield vs cap rate
Whereas gross yield is not a true reflection of the potential profitability of a rental property, capitalization rate (cap rate) is a more accurate metric that can be used for this purpose.
Cap rate does not take mortgage payments or depreciation into account but it does consider the net operating income (NOI), as well as the market value. NOI considers rent payments in relation to operating expenses such as routine maintenance, meaning that the cap rate will give you a clearer idea of your return on investment.
The limitations of cap rate vs gross yield lie in the fact that you need to know the more detailed numbers before you can calculate cap rate. If you only know the gross annual rent of a property, rather than the NOI, gross yield will be easier to measure.
Conclusion
Gross yield is a handy calculation to use when whittling a long list of investment opportunities down to something more manageable. For a more holistic assessment, you might choose to use a more broad rental yield calculator. As well as determining the gross yield, this will also show the net yield, cash flow, and payback period of a rental property.
Once you have decided on your next investment opportunity (with the help of our handy metrics), be sure to diligently track your income and expenses. Using a purpose-built app like Landlord Studio will allow you to stay on top of your bookkeeping, create reports, and manage your real estate investment portfolio with ease.
Learn more about how Landlord Studio can help you stay on top of your rental property finances →
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