Rental yield

What it means

Rental yield is annual net rent expressed as a percentage of the property's price. It shows how an investment in property pays back and makes it possible to compare properties with each other and with other investments, such as bonds or deposits.

Gross yield counts only rent before costs, while net yield deducts the costs of property management, maintenance, insurance, real estate tax, void periods and other expenses. Net yield is the closer reflection of reality.

Total return on a property consists not only of rent but also of the change in its value over time. Rental yield is therefore only one component, and investment decisions often supplement it with estimates of future price growth and financing costs.

How it works in practice

When assessing an investment property, it is wise to allow for a realistic vacancy rate, when space stands empty, and for repair and modernisation costs. Without them the yield looks better on paper than it will be in practice.

With loan financing, the yield is compared with the interest rate. If the yield is below the interest rate, the investment will not pay off without price growth. When assessing a loan, banks also look at the LTV ratio, the loan amount relative to the property's value.

Short-term rental to tourists can bring higher rent than long-term letting, but also higher costs, more work and bigger swings in occupancy. In long-term leases, rent indexation helps preserve the real yield in the face of inflation.

What to watch out for

Taxation of rental income reduces the actual return. Individuals and companies face different rules, and selling the property may create a further tax liability. After-tax yield is therefore a better measure for comparison with other investments.

Yields advertised by developers or agents are often gross and optimistic. Before buying, it is worth recalculating the net yield from one's own assumptions about rent, costs and occupancy and checking comparable rents in the area.