How to calculate rental yield.

Investing in real estate for rental purposes is becoming increasingly popular. Many people want to own a condo or house to rent out and collect rental income. However, for newcomers to real estate investment, it's unclear how to determine if a condo or house will generate a high return. It's not simply a matter of a low selling price or high rental income; both must be considered.

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Let's explain "Rental Yield": What is Rental Yield? Rental yield is the expected return from renting a property throughout the year. It's a widely used method globally.

However, it's a simplified calculation and prone to error, so it's usually only used for basic calculations. A commonly used formula for calculating rental yield is: Rental Yield = (Expected annual rental income / Purchase price) x 100. For example, if you buy a condo for 1,800,000 baht and can rent it out for 9,000 baht per month:

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Therefore: Expected annual rental income = 9,000 x 12 (12 months*) = 108,000 Purchase price = 1,800,000 baht Rental Yield = (108,000 / 1,800,000) x 100 = 6% Using 12 months to predict the annual rental income might be difficult because there will be periods of vacancy while searching for new tenants. We might use 10 months as a multiplier to minimize the error in the yield figure. How do you know if the rate of return is too high or too low?

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Generally, the average rate of return should be between 5-7%. If it's lower than this, the property is not considered a worthwhile investment, or consider it in terms of the loan amount; the rate of return obtained... The rental yield should be at least 2% higher than the average loan interest rate. For example, if the average loan interest rate is 5%, the return should be at least 7%. However, remember that this rental yield does not include capital gains from selling the property.

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Higher capital gains will further increase this yield, known as capital gains. Capital gains are the annual appreciation of a property. For example, buying a condo for 2,000,000 baht and holding it for 7 years allows you to sell it for 2,800,000 baht, representing a 40% increase in price over 7 years, averaging 5.7% per year. The rate of capital gain varies depending on the location. For example, in a prime location like Silom-Sathorn, capital gains can be as high as 15% per year. When to use Rental Yield? This calculation of the return can be used as a preliminary assessment when researching condos or houses you intend to buy for rental income. Study the market rental rates in that area to determine typical rental prices.

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Then, when you find a suitable house or condo for sale, you can calculate the return based on that price and the market rental rate. Let's look at the example of condo units A and B in the table below. At first glance, Room B has a lower rental rate per square meter than Room A. However, when calculating the Rental Yield, Room B actually has a slightly higher Rental Yield than Room A. Although the difference is not significant, what TerraBKK Research wants to convey is that when buying a house or condo for investment,

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We cannot look at it from only one perspective. We cannot judge investment potential solely based on a low price or only on higher rental income. Both factors must be considered together. Even though calculating Rental Yield is a simple method that can be done quickly, it has a high degree of error because real estate investment involves many complex factors.

For example, varying common area fees between projects, maintenance costs, vacancy rates, future property price growth, etc. Therefore, if you intend to invest, you must find a good, worthwhile property at a reasonable price, conduct thorough research, and be sufficiently confident in the potential of the location and the property itself.

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Thank you for the valuable information from Thansettakij.