Landlords usually play around with these 2 terms but most of the time they are somewhat confused which is which. Although they are quite similar, rental yield and ROI and very different because when you want to calculate both figures, there are several things to consider.
It is expressed in percentage and it takes into account the income and the service charges. Is is actually a prospective figure that is calculated annually assuming that rents and service charges will not change during the tenancy contract. This would be the base of what the net profit of an investor would earn annually for his property. You would also want to manage your properties well if you have a few of them.
On the other hand, the return of investment shows the amount of money received by the investor after all the costs have been deducted. It is also expressed in percentage but used to evaluate the profitability of an investment.
The main difference between Rental Yield and ROI is that an ROI is calculated based on the whole period an investor would have kept his property, including all the interests, capital appreciation and other costs like service charges, maintenance, utility bills and refurbishment.
So as a landlord, how do you calculate your rental yield annually?
You need to calculate the percentage return of the rental income excluding all the expenses like maintenance against the total purchase price of the unit.
For example, you have purchases a property for RM500,000 and monthly you receive RM4,000 from the rental payment. Yearly the total expenses for the house amounts to RM7,000.
First you calculate the gross rental yield.
RM4,000 x 12 = RM 48,000 (rental income per annum)
(RM 48,000/RM500,000) x 100 = 9.6% per annum
So the Net Rental Yield is calculated as;
(RM48,000 – RM7,000)/RM500,000 x 100 = 8.2%
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