How to Calculate Return On Investment (ROI) for Property Rental Yields

How to Calculate Return On Investment (ROI) for Property Rental Yields

How to calculate your ROI for your property’s rental income? How to determine whether a property worth or not to be invested as rental income property by using formula calculation? To sell or keep your property based on rental income generated?

CASE STUDY: HOW TO CALCULATE RETURN PROFITS ON RENTAL PROPERTY INVESTMENT

PROPERTY PROFILE

Property Type : Serviced Apartment
Size : 821 square feet
Purchase Price : $ 235,900.00
Down Payment : $ 23,590.00
Home Loan Amount : $ 212,310.00
Home Loan Installment : $ 1,173.00 per month
Gross Rental : $ 2,200.00 per month
Expenses : $ 832.37 per month

§  Service Charges = $ 164.05

§  Sinking Fund = $ 16.79

§  Quit Rent = $ 2.85

§  Assessments = $ 23.51

§  Fire Insurance = $ 16.00

§  Property Agent Fees = $ 183.33

§  Government Tax for Property Agent Fees = $ 9.17

§  Tenant move in/out where 1 or 2 months rental income maybe lost = $ 366.67 (Assumed lost 2 months = $ 4,400. Therefore, Extra Cost per month = $ 4,400 / 12 months = $ 366.67)

§  Repairs = $ 50

§  Total Expenses per month = $ 832.37 per month

Nett Rental = Gross Rental – Expenses
= $ 2,200.00 – $ 832.37
= $ 1,367.63

Monthly Cash Flow = Nett Rental – Home Loan Installment
= $ 1,367.63 – $ 1,173.00
= $ 194.63

Other Assumptions:
a) No Tax Implications on the Rental Income or on Disposal of the Property
b) No change in the rental rates, service charges or interest rates

HOW TO CALCULATE RENTAL YIELDS

Analysis: Let’s compare to a Fixed Deposit (FD) at 3% per annum, this property’s rental yields at 6.96% is a good investment. As a guideline, the rental yields in property must be more than double the existing Fixed Deposit rates. Properties take longer time than FD to cash out because properties are not liquid assets. Besides, properties involved with numerous property and management issues. Therefore, double the returns of FD rates in rental property investment are a reasonable benchmark.

HOW TO CALCULATE CASH ON CASH RETURN

This formula is mainly to calculate your yearly Nett Cash Inflow from the investment against your initially Cash Outflow which is the Down Payment.

Nett Cash Flow = Gross Rental – Home Loan Installment – Expenses
= $ 2,200.00 – $ 1,173.00 – $ 832.37
= $ 194.63

Analysis: Based on the result, my initial cash outlay of $ 23,590.00 for the down payment is now giving me returns of $194.63 per month or $ 2,335.56 per year or 9.9% per annum. I feel satisfy with the return rates of 9.9% p.a. Bear in mind, the rental income is not the only advantage in property investment. Do not forget the leverage power and capital appreciation in the property investment. Once adding everything together, the investment really sounds awesome! Please be reminded the formula is not applicable when Nett Cash Flow in either negative or zero figures.

HOW TO MAXIMIZE YOUR RENTAL INCOME

If you are looking forward to maximize your investment returns in rental properties, please look carefully on the formula given on above and the inputs. You may notice that most of the inputs example quit rent, assessment, fire insurance and etc are fixed. In another word, nothing much we can do on it. From the figures shown, the expenses on Property Agent Fees and cost of property stay vacant without tenant are some of the major factors affecting the result of the rental return profits. These areas are something controllable and worth for us to put more afford on it to ensure the maximum returns profit.

So, you get my points?

Rent out property continuously and consistently by yourself to maximize the returns profit!

Happy Investing!