If you are looking at generating regular income through rental income by investing in Real Estate, then, Rental Yield is an important factor to consider. Rental Yield is nothing but rate of return received from the rental income of the investment property. Rental Yield can be further drilled down to Gross Rental Yield and Net Rental Yield.
Gross Rental Yield only accounts for the rental income received from the property for calculating returns, whereas Net Rental Yield not only accounts for the income from the property but also accounts for the expenses incurred to maintain the property like taxes, maintenance expenses etc.
Net Rental Yield can be calculated as follows: –
Net Rental Yield = ((Annual Rental Income – Annual Expenses)/Purchase Price) X 100
Net Rental Yield is a good measure to compare Real Estate investment with returns of alternative investment option like Bank FD, Stocks, Mutual Funds and Gold.
If the Net Rental Yield from the property is less than even the risk free return, then probably an alternative investment option may be considered to better utilise your investible surplus.