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Investing in a rental home: yield

By 1 de March de 2022Investing in Madrid4 min read

Are you thinking about investing in a rental home, but have a few concerns about the yields? At Terra Homes we are here to help thanks to our experience with clients who have been investing in property for years. Below we are going to tell you about everything you need to know before taking the important step of buying a rental property.

How do you calculate rental yield?

Rental yield is a concept related to the acquisition price of the home and the rental profits received and is expressed as a percentage. The formula used to calculate rental yield is the following:

Yield = rental income/property value x 100

It is essentially the ratio between the rental income and purchase price of the property.

If we want to see the actual value of the investment, it is best to calculate the net yield from the rent. This means that from the gross rental income received we need to subtract the corresponding expenses (HOA costs, home insurance, etc.) and taxes.

Likewise, to the purchase price we also need to add further expenses, which generally represent 10% on top of the property price.

However, when it comes to the rental yield margin, there are other variables to take into account when working out if investing in a rental home is a profitable investment. Specifically, the following should be considered:

  • If the property has a mortgage, this is a concept known as cashflow, referring to the net amount left over after renting out a property for a specific rental term.
  • PER, referring to how many years it will take to pay off the home through rental income, which is the same as the gross yield formula, but reversed.
  • ROI, which is the percentage measuring the return on investment on an annual basis.

Is it profitable to invest in a rental home?

Buying a rental home has always been considered as being a good source of extra income in the case of small investors.

Rental yields mean that buying a rental property is a good option for anyone with enough savings to buy a second property. Be sure to bear in mind that in times of crisis, owning a property can be a disadvantage in regard to liquidity.

It is always important to be clear about the concepts affecting rental yield. Knowing whether to buy or not is relatively easy but it is never a bad idea to get some expert advice on the matter.

What yields can you get on a rental property?

Each quarter, the Banco de España publishes its calculations regarding the total annual yield on properties, taking into account rental yields and increased property prices (that is the capital gains if you choose to sell). According to this data, property yields have been at 3.7% for the last few quarters.

Tips on investing in a rental property

Although rental yield is a good benchmark to bear in mind, it is not infallible. That is why, before buying a rental property, it is important to really think about it and reflect.

For example, it is vitally important to look into the possibilities of the property being revalued, taking into account its current price and the conditions of the property market. It is also essential to analyse the possible finance options if you need to take out a mortgage to buy the property.

Likewise, it is important to not take on an investment which is over 40% of your income and to consider the costs involved with the property purchase. Another recommendation is to think about the property’s features and location, as those properties that have a smaller floor space often result in a higher rental yield.

In the case of wanting to reappraise the investment, it is a good idea to be optimistic in regard to possible tenants and to make the repairs required at the property to rent it out in the best possible condition. We think that all of this is important to bear in mind when thinking about investing in a rental property. This is probably one of the most important financial decisions that you will make, so we suggest that you really assess all of your options.