RICH Property Solutions, Ahmedabad
Pre-leased property rental yield: how to calculate it
Updated
Gross rental yield is the yearly rent divided by the price you pay, shown as a percentage. Net yield takes your yearly costs off the rent first. Compare properties on net yield, using the full cost you will actually pay.
The formula
Gross yield = yearly rent / total purchase cost x 100
Net yield = (yearly rent - yearly costs) / total purchase cost x 100
Total purchase cost is the price plus stamp duty, registration and any legal or other fees.
A worked example
These numbers are made up to show the method. They are not an offer or a quote.
| Purchase price | Rs 1,00,00,000 |
|---|---|
| Stamp duty, registration and fees | Rs 7,00,000 |
| Total purchase cost | Rs 1,07,00,000 |
| Monthly rent | Rs 60,000 |
| Yearly rent | Rs 7,20,000 |
| Gross yield | 7,20,000 / 1,07,00,000 = about 6.7% |
| Yearly costs paid by the owner | Rs 30,000 |
| Net yield | 6,90,000 / 1,07,00,000 = about 6.4% |
What brings an advertised yield down
- Stamp duty, registration and legal fees added to the price
- Property tax and maintenance the owner pays
- Tax on the rental income
- Months without rent if the tenant leaves
- Rent that stays flat while costs rise
How to compare two properties
- Use the same total purchase cost basis for both
- Use net yield, not gross
- Check how many years of lease are left
- Check how much the rent rises each year
- The tenant
Compare two properties lease by lease. Our pre-leased property page lists what we check, and this page explains the basics.
This page is general information. It is not legal, tax or investment advice. We read the documents with you, and your own lawyer and chartered accountant go through them too.
How rent increases change the return
Many leases raise the rent by a set percentage after a fixed number of months. Using the same example as above, a monthly rent of Rs 60,000 that rises 5 percent after a year becomes Rs 63,000. The yearly rent then moves from Rs 7,20,000 to Rs 7,56,000. These numbers are for illustration only.
Look at the rent increase clause and work out the return over the full lease term.
What is a good rental yield?
There is no single good number. A yield means little without the lease behind it. A high yield on a short lease with a weak tenant carries more risk than a lower yield on a long lease with a strong tenant. Compare the yield with the risk and with what else you could do with the same money.
Rental yield and capital growth are different
Rental yield is the income you receive each year as a share of the cost. Capital growth is the change in the property's value, and it is not guaranteed. A pre-leased property is bought mainly for the yield, so judge it on the lease first.
Is the yield on the listing the yield you will get?
Not always. Listings often show gross yield on the asking price. You pay stamp duty, registration and fees on top, and you may pay property tax and maintenance as the owner. Recalculate it from the lease, as shown above.
What is the 1% rule in real estate?
The 1% rule says the monthly rent should be at least 1% of the price you pay. A property bought for ₹1 crore should rent for ₹1 lakh a month. That is a gross yield of 12% a year. Investors use it as a quick filter before they work out a full return.
What is the 2% rule?
The 2% rule asks for a monthly rent of 2% of the price. On ₹1 crore that is ₹2 lakh a month, or 24% a year. It comes from other property markets and is a stricter version of the 1% rule.
Does the 1% or 2% rule work in India?
Use it as a rough check and no more. A rent of 1% of the price a month means 12% a year, and few properties pass that test at current prices, so the rule would reject almost every purchase. Compare the rent you can actually expect with the price, then work out the net yield as shown above. Net yield counts costs such as tax, maintenance and vacancy.
What affects returns most on a rental property?
The biggest risk is a gap in the rent. A tenant leaves or stops paying, and the property earns nothing while the costs continue. These steps reduce it:
- Check who the tenant is and how long they have been in business
- The lock-in period and what happens when it ends
- Keep a security deposit that covers several months
- Know how long it usually takes to find a new tenant in the area
- Put every term in a registered lease
Our guide on finding a tenant covers the search, and the guide on pre-leased property covers how to buy with a tenant in place.
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