When it comes to real estate investment, particularly residential real estate, the likelihood of you falling in love with a real estate asset is stronger than it is for other less tangible asset classes (bonds, stocks, pensions etc).
In my previous posts I spoke of the first two factors that you need to consider before investing in a property i.e. Net Rental Income & Cash-on-Cash Return.
In this post we will review the next item you must know well in order to get a clear idea of how good an investment a property is.
Net Rental Yield
Many real estate agents will quote gross yield rather than net yield. However, net yield is the figure you need to work off particularly if you’re investing in new geographic territories; you need to do your due diligence and work out the running costs associated with that particular piece of property.
Gross Rental Yield = Annual Rent/Property Cost
So, using the same numbers as the above example, Gross Yield = $950 x 12/€100,000 = .114 i.e. 11.4%
Net Rental Yield = Annual Rent – Operating Costs / Property Cost
So, using the same numbers as in the above example, Net Rental Yield = $700 x 12/€100,000 = .084 i.e. 8.4%
So when a real estate agent quotes you a yield of X% for a particular property, ask him/her whether that’s gross or net. If they stare at you blankly than make sure you do your own research on the costs of running the property. As a guideline, you can estimate 30% of the rental income for operating costs but again you’d have run your own costing analysis on each property to arrive at an accurate figure.
Having worked out the net rental yield for a particular property, you can compare it against the potential net rental yields from other investment properties to help you decide which offers the best opportunity for net positive cash flow.
In our next post we’ll explain the fourth and final factor you must consider before investing into a property to ensure your money are well invested and not down a pit hole.
P.S. Visit www.MillionaireMindsetSecrets.com and sign-up for FREE insights, tips and exclusives on Real Estate Investing – utilizing our powerful income and wealth creation strategies can fast-track your wealth building so that you get rich for life and build wealth that lasts.
About Keelan Cunningham
Keelan Cunningham is an entrepreneur, multiple business owner, author, and personal finance/wealth building specialist. Keelan’s passion is helping people improve their business acumen and personal wealth creation strategies, so they can lead a truly wealthy life in all aspects and with any luck similarly transform the lives of others.
The Rools of Cool. That’s how we like it! Critical is fine, but if you’re rude, we’ll delete your stuff. Please use your PERSONAL name or initials and not your business name and do not put your website in the comment text, as both come off like spam. Be relevant!
Have fun and thanks for adding to the conversation!