Net Rental Yield Calculation for Real Estate Investors

STILL LIFE OF CRUNCHING NUMBERS
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The beginning of a successful rental property investment strategy is an accurate estimate of rental yield for the prospective property. Here we see how to calculate Net Rental Yield, which takes the property expenses into account, though not the mortgage payments. Then we look at the same property with the mortgage included, and using the actual cash invested. This gives us a cash-on-cash rental yield.

At the end of this example is a link to two spreadsheets, one a sample and the other a blank one ready to calculate the net rental yield and cash-on-cash rental yield from your inputs.

Net Rental Yield:

Monthly Rental Amount $2,400.00
Percent of Year UnOccupied 5%
Take out for Vacancy for Annual Cash In of $27,360.00

Annual Insurance Cost $1,200.00
Annual Taxes $1,400.00
Annual Repairs Budget $600.00
Percent of Rent Mgmt Fee of 6%
These expenses total to Annual Cash Out of $4842

Income of $27,360 minus cost of $4842 = $22,518 rental income after expenses

Property Acquisition Cost $300,000.00

$22,518 divided by property value of $300,000 = Rental Yield of 7.5%

Cash-on-cash Rental Yield:

Monthly Rental Amount $2,400.00
Percent of Year UnOccupied 5%
Take out for Vacancy for Annual Cash In of $27,360.00

Property Acquisition Cost $300,000.00
Less Down Payment - Cash In $60,000.00
Amount of the loan $240,000.00

Payment Monthly Pricipal/Interest $1,556.64
Annual Insurance Cost $1,200.00
Annual Taxes $1,400.00
Annual Repairs Budget $600.00
Percent of Rent Mgmt Fee of 6%
These expenses total to Annual Cash Out of $23,521.28

Income of $27,360 minus cost of $23,521 = $3839 cash return over cash out

$3839 divided by cash investment of $60,000 = Cash-on-cash Rental Yield of 6.4%

Why Is Rental Property Better than Stocks and Bonds

I'm not suggesting that you or the client you're working with take all of the money out of other assets and plow it into real estate.

 However, diversification is always smart, and you can't do better than rental property.

Risk vs Reward

When it comes to risk, few would argue that in the short term the stock market can be quite risky.  Over time the blips often correct and get back on track.  But, if you can't wait that out you can lose money easily.  A little bit of bad news or a bad earnings report can take a stock down hard for a while.

A properly selected rental home will provide monthly positive cash flow and be relatively insulated from bad economic news.  The tenant still needs a place to live, even if the stock market just took a dive.  Over the long haul you should also be building equity through value appreciation and paying down the mortgage.  This equity can be tapped for other investments.

Return on Investment

Bonds are less risky, but the trade-off is low yields.  Bond interest for the safer municipal and government bonds is lower than corporate bonds, but those are not really that great either.  As I write this, the average Moody's Aaa Corporate Bond Yield is only 3.69%.  It's hard to get excited about this, especially if you're retired and on a fixed income.

The monthly cash flow of a good rental home can easily provide double those returns, especially with tax advantages you don't get with other asset types.

 You can also use leverage with mortgages.  Instead of taking $150,000 out of bonds to buy a house cash, you could just take out around $30,000 for a down payment and stay diversified with a better return on your investment.

Learn the calculations to evaluate rental homes and do your due diligence, as it's a road to a better retirement.  Check out other real estate investment strategies for the short term as well.