{"id":71313,"date":"2015-03-25T05:00:52","date_gmt":"2015-03-25T11:00:52","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=71313"},"modified":"2021-03-16T10:29:45","modified_gmt":"2021-03-16T16:29:45","slug":"2015-03-25-rental-yieldanswer-questionis-property-worth-it","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2015-03-25-rental-yieldanswer-questionis-property-worth-it","title":{"rendered":"Beyond Rental Yield: How to Answer the Question, “Is This Property Worth It?”"},"content":{"rendered":"

For any given rental property, there is a single statistic that, in the end, is the defining factor of that property’s success: its rental yield<\/strong>. The rental yield of a property is calculated with a fairly simple equation:<\/p>\n

Yield = (Annual Income-Annual Expenses)\/(Cost of Property + Rehab)<\/em><\/p>\n

Note that cost of property<\/strong> doesn’t include your mortgage payments — those are part of annual expenses<\/strong>. The cost of property does<\/em>, however, include absolutely everything you will have to pay for before you can start renting the property out, including down payment, closing fees, costs of all renovations, costs of advertising\u2026\u00a0everything<\/em>.<\/p>\n

Here’s an Example<\/h2>\n

So let’s say you purchase a house for $120,000, but you only put $30,000 down. A typical 30-year mortgage at 4% would have you paying $420\/month for the other $90k (this is NOT a rate quote APR, mortgage police!). Then you hire a property management company to handle the details for you, and they charge 10% of your monthly rent amount. You set your rent at a quite reasonable $1,000\/month, so the property management company takes $100\/month to take care of the house. You pay an additional $280\/month for various forms of insurance, a rainy-day fund in case of emergencies, and basic maintenance costs.<\/p>\n

Related:<\/strong> The Pivotal Factor You Probably Don\u2019t Know to Watch for in a Rental Market<\/a><\/em><\/p>\n

So now you know that your annual rent is $12,000, and your monthly expenses are:<\/p>\n

$420 (mortgage)<\/p>\n

– $100 (property management)<\/p>\n

+ $280 (maintenance and insurance)<\/p>\n

——————–<\/p>\n

$800<\/p>\n

x 12 (to arrive at annual expenses)<\/p>\n

——————–<\/p>\n

$9,600<\/p><\/blockquote>\n

So, you have $12,000 in predicted income minus $9,600 in predicted expenses, giving you a total of $2,400 for the top number of your equation. Since you paid only $30,000 down on your home but<\/em> you also paid $3,000 in closing costs and $17,000 to renovate the kitchen, bathroom, it’s a total of $50,000 put in.<\/p>\n

So your final rental yield is $2,400\/$50,000, which divided out gives us a yield of 4.8%.<\/strong><\/p>\n

The Bigger Picture<\/h2>\n

Knowing the rough yield for a potential investment property is a must! However, it can also be very useful to find out data on historical yields in the neighborhood around<\/em> your property. Here’s why:<\/p>\n