What is the difference between gross and net rental yield?
Read this article to learn the difference between gross and net rental yield and see an example of how both are calculated.
Gross rental yield
Most articles that highlight market trends, or compare different real estate markets, use gross rental yields. For example, this UK Buy to Let Rental Yield Map uses gross rental yields. Gross rental yields do not take into costs, making it easier to do broad level comparisons.
Gross rental yield = (Annual rental REVENUE/Property value)*100
Net rental yield
Although gross rental yields tend to dominate real estate literature, property buyers need to focus on net rental yields. This enables you to see exactly what a property will do for you financially and enable you to benchmark your real estate investment to other asset classes.
Net rental yield = (Annual rental INCOME/Property purchase price + Closing costs + Refurbishment costs)*100
Case study: Gross vs net rental yield
A Moving2Madrid client purchased a property in the Lavapiés neighborhood in Madrid, at Calle Mesón de Paredes, 64. They purchased the 53m2 property for 205,000€. They charge, on average, 2000€ per month to rent the apartment on the short-term rental market, thus their annual rental revenue is 24,000€. This translates to a gross rental yield of 11.7%.
Gross rental yield = (24,000/205,000)*100 = 11.7%
Although this looks like an excellent yield, it is misleading to focus on it because it does not take into account any costs associated with purchasing, and maintaining, the property.
The total closing costs on the apartment were 32,179€. Furthermore, it cost the owner 46,000€ to refurbish the two bedroom, one bath apartment. Both of these costs need to be added to the property value in our net rental yield calculation. This yields a property value of 283,179€.
The apartment has the following costs associated with maintaining the property:
Property management fee (including IVA): 4,800€
Gas and power: 1,088€
Community fees: 780€
Property and urban waste tax: 300€
House insurance: 200€
TOTAL YEARLY COSTS: 7,708€
Subtracting these from the annual rental revenue of 24,000€ yields an annual rental income of 16,292€, thus:
Net rental yield = (16,292/283,179)*100=5.8%
Although it is tempting to focus on gross rental yields because they are easier to calculate, it can be misleading when you are benchmarking your real estate investment to other asset classes. To get an accurate picture of the return your property investment yields, you should focus on its net rental yield. This takes into account:
- All closing and refurbishment costs
- All yearly maintenance costs
Do you want to find a Madrid property that yields well in excess of the 4.6% Madrid market average? Then CONTACT US TODAY to arrange a FREE CONSULTATION.