Understanding Gross vs Net Rental Yields when Investing in Property

By knowing the difference between gross and net rental yields, you will be able to calculate your profit more effectively.
Gross vs Net Rental Yield Investing Property

There are many ways to invest in properties in Singapore. You can buy older flats and hope for the Selective En bloc Redevelopment Scheme (SERS) to happen, purchase properties close to major future development sites, or rent out your property to a tenant.

The former two means are relatively dependent on chance, as there is no way of knowing whether or not your property will be selected for en bloc. It is also difficult to tell if future development sites will influence the selling price of your property, and when the best time to sell your property is.

The ability to retain ownership of your property makes renting popular among property investors, as you can still earn a passive income from your tenants while waiting for prices to go up. Many investors concurrently rent out their properties while waiting for an increase in property value to maximize their possible income.

This article will walk you through how to calculate your expected rental yield when it comes to house or room rentals in Singapore. 

What is gross rental yield?

Gross rental yield refers to the income that you earn from renting out your property per year, as a percentage of the property’s total value. 

For instance, if your property was worth $400,000 and you charge $2,000 in rent per month, your gross rental yield would look like this:

($2,000*12 / $400,000)*100% = 6%

You would have a gross rental yield of 6% per month, which is considered very high. Typically, any percentage above 3% is considered high.

For most landlords, however, the gross rental yield for renting a house or room is an inaccurate way of calculating income. If you’re only looking at short-term rentals, the gross rental yield is a quick way of gauging the overall value of a property. 

If you are not implementing short-term rentals, the gross rental yield quickly becomes very inefficient. That’s because there are a lot of other hidden costs when it comes to profitability, such as damages to your house/room, electrical bills, wear and tear, and depreciation. 

As a result, alternate methods of calculating profitability were developed. One of these methods is the net rental yield. 

What is net rental yield?

Those with an accounting background will be familiar with the terms revenue and profit. The previous rental yield is known as the gross rental yield, which accounts for the revenue earned, but not the expenses. 

Net rental yield gives an accurate assessment of your profitability - PropertyGuru Singapore

A net rental yield gives an accurate assessment of your profitability

Your profit is calculated via the net rental yield, which accounts for the expenses incurred while renting out your property. This is a very tricky way to calculate your yield, as it takes many variables into account. However, it is by far the most accurate way of calculating your rental yield.

If you’re wondering about how you can calculate rental yield, fret not. We have included an example of how you can calculate net rental yield in the table below.

Given a property value of $400,000, the following would be the gross rental yield and net rental yield:

Property tax

$24,000

$15,000

Maintenance bill

Agent commission fees

Bank loan interests

Utility expenses

Depreciation/ (Appreciation) rate


Given a property value of $400,000, the following would be the gross rental yield and net rental yield:

Gross rental yield

Net rental yield

$24,000 / $400,000 * 100% = 6%

$15,000 / $400,000 *100% = 3.75%

What is considered a healthy net rental yield for property investment?

While rental rates become higher as you get closer to the city, you’d be hard pressed to find a property worth only $400,000 along Orchard Road. If you stay in Cairnhill Nine, located on Cairnhill Road, a single unit could cost you $3 million. Renting out your unit at $4,000 per month would only get you a 1.2% gross rental yield. 

In comparison, Cambio Suites in Serangoon goes for approximately $1.3m. Renting a unit out for $3,000 per month would see you a gross rental yield of 2.8%.  

Industry experts have pegged a healthy net rental yield at approximately 1-2%. However, those living in HDBs who are looking at renting out their properties should keep in mind that there is a Minimum Occupancy Period to fulfil before they can rent out their property.

To know more about being a landlord, you can check out one of our guides.

 

To get more guides like this, check out PropertyGuru.

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