What is it?
The annual rental income, expressed as a percentage of the property purchase price, is called rental yield. This is also the amount that you as a landlord get in return on your investment before you pay any tax, maintenance charges or other associated costs.
How is it calculated?
Rental yield is the total yearly rent divided by the house price and is expressed as a percentage. The formula is: monthly rent x 12/house price x 100. Here the house price is the existing capital market value of the property.
What it means for you
You can use rental yield data to understand how attractive a particular property is. Properties with higher rental yields are more attractive investment opportunities and are more reasonably priced. Though rental rates depend more on the location and infrastructure facilities around the property, a low rental yield may indicate that the property is overvalued.
What’s its significance
For any real estate market, calculation of rental yield helps in observing the movement of rental rates in the region. It also helps in drawing a correlation between capital values and rental income from a property. For instance, a recent survey conducted by ICICI Securities Ltd in India found that rental yield across high-priced properties are witnessing a decrease. It added that low-priced properties have been witnessing an increase in rental yield. This suggested that low-priced properties, which are often small in size, are more in demand.
Problems in the Indian market
Analysts believe that the concept of rental yield is not applicable completely to the Indian context since the capital appreciation of properties in India is much higher than rental appreciation. The rental appreciation cannot keep pace with the pace of appreciation in capital values due to the speculative environment in certain markets.
Also, unlike organized markets such as the US and the UK, the Indian real estate market does not have tabulated data on rental income and property value for each city and region. This makes the task of calculating a national average difficult. Moreover, the real estate market in India is diverse and different in each state. For instance, Delhi-NCR market is more speculative and investor-driven, while Mumbai is more end-user driven.