What is Yield? Things that novice investors should know

Everybody may wish to do nothing but has income flowing into pocket continuously or the income called ‘Passive Income’ There are many ways to make passive income and one of the most popular investment nowadays is ‘Condo for rent’

Of course, condo rental is not an easy thing to do because we have to calculate how much the rental should be. Thus, the word ‘Yield’ was made in the real estate industry.  What’s the meaning of this word? How can we calculate the rental? Let’s follow ACU PAY and find out!

Get to know Yield

Yield refers to the rate of return on investment in various assets over a period, which is called different according to the type of assets invested, such as

The return of investment on “stock” called “dividend”

The return of investment on “real estate” called “rental”

The yield here depends on the volatility of investment securities. Yield is usually shown as a percentage (%) per annum following the amount invested, current market value, or par value of securities. 

We can use the Yield to predict future economic and interest rate trends. For example, if bond yields rise sharply, inflation may occur and there is a trend that the banks will raise interest rates.

Rental Yield, the return rate on investment of condo for rent

Those who are planning to earn income from their condominium investments should come to know the first type of Yield called Rental Yield. 

Rental Yield is based on the calculation of the expected room cost and rent from condominiums to set an appropriate price. In general, they are divided into three categories: Gross Rental Yield, Net Rental Yield, and Cash on Cash Rental Yield.

1. Gross Rental Yield

It is the rate of return on a preliminary renting. This is in the manner of a condominium purchase that will be rented out immediately without any furniture or facilities being furnished to tenants. It is suitable for investors who buy their properties with their cold money and do not take out bank loans.

This type of yield can be calculated from the following formula.

Gross Rental Yield (%) = (annual expected rental ÷ condo price) x 100

2. Net Rental Yield

A calculation is suitable for investors who purchase assets for investment. There will be additional expenses such as common fee, brokerage fees, and other maintenance costs.

This type of yield can be calculated from the following formula.

Net Rental Yield (%) = [ (expected annual rental – annual additional cost) ÷ Condominium price ] x 100

3. Cash on Cash Rental Yield

The rate of return on renting from cash in an annual. The calculation is suitable for investors who borrow bank loans to buy buildings or condominiums for rent, resulting in other expenses such as installment, interest, common fee, and decorative expenses. These investors are expecting higher rentals than their monthly installments.

This type of yield can be calculated from the following formula.

Cash on Cash Rental Yield (%) = [(Annual rental – Annual additional cost) ÷ Investment ] x 100.

What level should Yield be at to be worth the investment?

In investment, the higher the percentage of Yield, the higher the probability of return on investment. For real estate investment, the minimum yield should be 6 – 8% per annum, which would be worth investing in. If you take out loans to invest in condominiums, you have to consider interest rates. The yield should be 2% higher than the interests of banks. Nevertheless, you should be careful. Sometimes a high percentage may come from a lower value of securities. Investments with higher percentages than interest should be preferred.

That’s all about Yield for novice real estate investors. Studying data and calculating different types of Yield will give us a good return, not a loss, and the Passive Income we dream of will come true.

related articles