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Tata Capital > Blog > Wealth Services > Using Rental Yield for Real Estate Investment

Wealth Services

Using Rental Yield for Real Estate Investment

Using Rental Yield for Real Estate Investment

Real estate investments have always been considered stable and reliable. Demand for rental properties is high in a fast-growing economy with a large population like India. This makes rental real estate a profitable asset class for investors.

Apart from increasing urbanization, the demand for rental properties has also increased due to the various government policies implemented to provide affordable housing. Several laws have also been enacted to prevent tenants and landlords. These initiatives have strengthened the real estate sector and made rental real estate a safe investment option.

Rental real estate assets are tangible assets whose value can increase over time. Compared to other investment options, rental real estate can provide a consistent passive income. Hence, it is an attractive investment option for investors looking for long term wealth generation.

What is rental yield

Rental yield is rental income earned from a property as a percentage of the property value. There are two types of rental yield: Gross rental yield and Net rental yield.

Gross rental yield is the total income earned from the rental real estate asset expressed as a percentage of the asset value. The asset value consists of purchase, closing and any renovation costs of the asset. Gross rental yield is not an accurate profit earned through a rental real estate asset.

Net rental yield includes expenses incurred yearly on the asset. These expenses could be legal charges, insurance premiums, maintenance charges, repair charges, management charges, housekeeping costs etc. To obtain the Net rental yield, the expenses incurred on the property are subtracted from the total income earned from the property.

To estimate the rental yield potential of a real estate asset, Net rental yield is a more accurate indicator.

What factors affect rental yield

1. Location

Location plays a vital role in determining the rental yield of a property. People wish to rent properties in areas with access to amenities such as schools, hospitals, shopping malls, etc. Good ease of access to the location increases the demand for the rental property. A location with high employment opportunities ensures a steady stream of tenants.

2. Type of property

Two kinds of property are generally considered for rental real estate: residential and commercial. Commercial property has a higher rental yield than residential property. Among residential properties, apartments have higher demand and, hence, higher rental yields though it varies depending upon the location.

3. Economic factors

A booming economy provides higher rental yields for properties. This is due to increased demand caused by urbanization. On the other hand, adverse economic conditions such as a slowdown or recession cause lower rental yields due to low demand for rental properties.

How to maximize rental yield

1. Renovations and upgrades

As the saying goes, spend money to make money. Renovations and upgrades of the rental property make it attractive to the tenants. New upgrades such as energy-efficient solar panels, reduce utility costs and make the property more attractive to current and prospective tenants. These renovations and upgrades also justify a higher rent.

2. Effective property management

Effective property management is essential to maximize rental yield. Good property management practices include proactive maintenance, regular inspections and prompt tenant complaint redressal. Happy tenants ensure a longer occupancy. Also, a well-maintained property provides rental yields for a long time.

3. Maximum property utilization

Identifying and utilizing all the income-producing assets of a rental property also ensures a high rental yield. These assets include parking space, laundry room, park, swimming pool, etc.

4. Learning tenant preferences

Surveying and learning about tenant preferences in the location is crucial for maximizing rental yield. Properties built/designed/furnished according to tenant preferences in the area lead to higher demand and longer tenancies.

What is a good rental yield

According to experts, a good rental yield is not always a high net rental yield. A good rental yield ultimately depends upon the experience and requirements of the investors. While some investors prefer high net rental yield for immediate cash flow, others look for solid capital growth over time.

Conclusion

Beyond the bricks and mortar lies a wide world of possibilities. Real estate investment embodies tradition and modernity, offering financial growth and stability avenues. With the right research and a long-term perspective, real estate investment can be your portfolio's cornerstone of wealth creation.

With Tata Capital Wealth, real estate investment has become easier than ever. Aided by our curated property list and selection of developers, you can invest in the right property to meet your future goals and earn rental yield. Visit our website to request a callback today!

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