How is rental yield calculated?

Rental yield is a key metric used by property investors to evaluate the effectiveness of their investment. It provides insight into how much return a property generates relative to its cost. The correct method for calculating rental yield involves dividing the annual rental income by the property's purchase price or its current market value. This approach allows investors to understand the yield as a percentage, which facilitates comparisons across different properties and investment opportunities.

For example, if a property generates $12,000 annually in rental income and was purchased for $200,000, the calculation would be $12,000 divided by $200,000, resulting in a rental yield of 6%. This percentage helps investors gauge how well their property is performing relative to the capital they have invested.

In contrast, multiplying the annual rental income by the property's purchase price does not yield a meaningful figure for rental yield. Adding the property's selling price to the annual rental income also does not provide information about the return on investment, as the selling price is not relevant in calculating yield. Furthermore, determining the future value of a property involves forecasts and speculations that do not contribute to the calculation of current rental yield. Hence, dividing the annual rental income by the current market value or purchase price is the recognized and accurate method for calculating