What Is Rental Yield?

If you’re new to real estate investing, understanding rental yield is key.

What is it and what makes it one of the most important elements for rental property investment success? It’s basically an important measurement for the kind of return on investment (ROI) you can expect on a rental property. A good rental yield could be a sign of a good return, but of course, there are more details involved. We’ll cover everything below.

Investing in rental properties is a great new venture for many people who’ve never considered real estate investing before. It’s a great way to diversify your investments while also realizing stable and positive cash flow for the long-term.

However, finding and maintaining a profitable income property won’t be easy if you don’t know how to actually evaluate its profitability. Rental property with a good rental yield is a good place to start.

There are two forms of rental yield: gross rental yield and net rental yield. Gross rental yield is a simpler metric that doesn’t take the property’s expenses into account, while net rental yield does. Net rental yield is usually a better metric to look at because expenses don’t always scale linearly with income, meaning that as you earn one dollar in income, the expenses associated with that income are not always the same for different properties.

Gross Rental Yield

Gross rental yield for your rental property is its annual rental income divided by your property’s value/price (multiplied by 100 to get the percentage). The property’s price is comprised of the purchase price, all closing costs, and any renovation costs.

If your rental property has a value of PHP 300,000 and rents for PHP 1,000 a month, the gross rental yield is:

Annual Rental Income: (PHP 1,000 x 12)= PHP 12,000

Gross Rental Yield: PHP 12,000/PHP 300,000= 0.04 x 100= 4%

Gross rental yield isn’t the most accurate measurement of an investment’s return because it’s missing a key part of the workings of a rental property- the expenses.

Net Rental Yield

A more valuable number, the net rental yield, also known as the capitalization rate (cap rate), includes the operating expenses for the property. Evaluating what is a good rental yield is more reliable using the “net” calculation because it takes into account key expenses which can cut into profits. These include legal fees, loan fees, building inspections, repairs and maintenance, management fees, vacancy costs, insurance costs, and other rates and charges.

It can be calculated by subtracting annual expenses from the annual rent, then dividing that number by the property’s value and multiplying the final number by 100 for the percentage.

Continuing with the same example, let’s now include your rental property’s total expenses for the year (PHP 3,000) and a vacancy rate of 20%. Net rental yield is:

PHP 12,000 * (1- 0.20) - PHP 3,000= PHP 9,600/PHP 300,000= 0.03 x 100= 3.2%

What Is a Good Rental Yield?

Since there is no definite ‘good yield’ percentage, it all comes down to each property’s various features. It’s easy to assume that a higher rental yield means a higher return or a greater property value, but this may not always be the case.

Typically, a property with a high rental yield implies that it is undervalued or below market value. This is usually considered to be between 8-10%. While a property with a low rental yield, which is anywhere between 2-4%, can mean that it is overvalued.

As an investor, high rental yields are better because they usually generate a steady cash flow. Investors generally aim for properties with a rental yield above 5.5% because of the stability in rental income. For potential home owners, looking at median rental yields across the country can help to determine what your interests and ideal outcomes might be.

Understanding what rental yield is and how it is calculated can help to determine your potential profits and losses on a property you already own or on one you’re looking to invest in. Evaluating and comparing property values and their respective rental yields can be useful to invest your money wisely and realize your home owning dreams.

Manila’s appeal as property investment site declines

Manila dropped two spots to 19th in a ranking of city investment prospects in the Asia-Pacific for 2021, a joint report from the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC) said.

The 2021 Emerging Trends in Real Estate report said that Manila’s prospects as a real estate investment destination have dropped over recent years. The Philippine capital ranked as high as third in 2017, then dropped to 18th a year after.

Ranking 19th out of 22 cities in the region, Manila was classified as having “fair” investment prospects this year.

ULI said Manila had fallen in the rankings due to “Southeast Asia’s reputation as a high-risk play in times of global recession.”

Topping the list this year are Singapore, Tokyo, and Sydney.

Overall scores in 2021 are not too different from the previous year, ULI said, likely due to the cities’ effective pandemic containment measures, and profitable investment opportunities.

Real estate investors said their top concerns for this year include the impact of the pandemic on property values, economic growth, trade or geopolitical tensions, and vacancy rates.

In the ULI report, Manila ranked 13th in the city development prospects ranking and 20th among cities most likely to see rental growth this year.

ULI said that there are lower scores overall for city development as developers weather “questionable” demand during a region-wide recession.

Future office demand, it added, will be decentralized to reduce commutes, which means satellite cities like Clark could signal some real estate growth in the Philippines.

“The Philippines is a good example of this, with moves afoot to establish new satellite cities, such as Clark, on the periphery of Manila, as a way to relieve the demographic stress,” ULI said.

ULI Philippines Chairwoman Jean Jacquelyn de Castro noted the decline in the country’s investment prospects ranking over recent years.

“Building back investor confidence will require stakeholders to work closely with the government to improve the attractiveness of Philippine real estate as an investment class,” she said.

Real estate services firm Santos Knight Frank Chairman and Chief Executive Officer Rick M. Santos said that the Philippines can have real estate opportunities in logistics, data centers, and industrial sectors.

With megatrends such as e-commerce growth, decentralization outside Metro Manila, and continued outsourcing and BPO (business process outsourcing) expansion in the Philippines, we expect to see a soft rebound in the real estate market as the economy gradually recovers.

Full Report: he 2021 Emerging Trends in Real Estate Asia Pacific

emerging-trends-in-real-estate-asia-paci

.

Download • 16.46MB

Source: ULI and BWOnline

8 tips to finding the right location for your business

It’s often said that the three most important things to consider when buying a home are location, location, location.

It’s the same when you’re looking for a place to put up your business. Especially for retail stores, restaurants and many other enterprises, finding the right location is a crucial step to ensure immediate profits and initial success.

So how do you find that most suitable place to put up your business? Do you simply look for a commercial area with a lot of people? What role does competition play when choosing your business location?

Here are eight tips that can help you check if that space available for lease that you’re considering is the right one for your business.

1. Study the demographics of the area

There are two things to bear in mind when studying the demographics of a potential location.

First is your target market and second is your manpower requirement. Your location should be able to provide you not only with customers but also with employees as well.

The second factor is not as important as the first, but employing people from the area will greatly help in your marketing efforts. Do some due diligence and study the communities within and around your prospective location.

2. Determine the sources of foot traffic

Foot traffic or the number of people who pass by the area is important if your business will mostly rely on walk-in customers. You can do a physical count during different times and days to come up with an estimate of the foot traffic.

But beside that, you should also consider the sources and quality of this traffic. Where are they coming from and where are they going to?

This will help you determine the mindset of the crowd and check if your business can catch their attention or if they’ll just ignore and pass you by.

3. Evaluate the security and accessibility of the location

There are three groups you should think about when studying the security and accessibility of an area–your employees, your customers, and your suppliers.

Some of the questions you should ask yourself are: Is it safe to do your planned business in the area? Is it accessible to you and your employees? Will it be easy for your customers to find you? Is there ample parking for customers who have cars? Are there accessible suppliers in the area?

4. Analyze the competition

Who will be and where are your competitors? How is their business doing? If these establishments are already having a hard time keeping themselves afloat, then putting up a similar business in the locality is close to suicide.

However, if you believe that the business is indeed profitable and you want to penetrate the existing market, then the best place to put your business is as close to your competition as possible. Why? Because by doing so, you are likewise making yourself closer and more available to your target market.

5. Get to know your neighbors

Always consider what businesses are operating near your planned location. These can affect the image of your business and may give wrong impressions to your potential customers.

For example, a laundry shop will probably not do well if it’s located beside a vulcanizing shop because these establishments give conflicting images of cleanliness. However, a coffee shop may be able to drive customers in if it’s located near a video rental shop because both businesses usually have the same target market.

6. Check it against your space, facility and utility requirements

Will the area be enough for your business? It may be tempting to lease out an area because it’s in a good location or because the rent is cheap, but always make sure that it can also satisfy your space requirements and has all the facilities you need.

Additionally, check your utility service providers if the place is within their coverage area. A friend of mine almost rented a place to put up an internet café but he canceled his plans when he found out that there is no broadband internet service available for the area.

7. Be aware of the local ordinances and zoning policies

Don’t jeopardize your business by operating illegally.

Make sure that your business location will not break any city ordinance or zoning policy. For example, adult entertainment establishments are normally banned from operating within a certain distance from schools.

Furthermore, you should also be aware of other local regulations that could affect your business operations. For example, most homeowners’ associations ask for monthly fees to operate a business inside their subdivision. You should become aware of this and include it in your initial capitalization and list of overhead costs.

8. Consider possible plans for expansion

This may not be an immediate concern, but optimistically thinking about business expansion helps in determining the potential of your desired location. Moving your business to another location is not an easy task. That’s why you have to consider the options available if ever your business would grow and require more space.

If it’s not possible to rent out the adjacent lots or do a reconstruction of the place, then at least go around the area to see if there are bigger and better spaces you can move into when the time comes.

Source: Businessmirror.com