Rental yields

Dear reader,

Thank you for stopping by our company website, it will be a pleasure to assist and educate you about the property numbers you must know with a series of articles called “Panama Link Investment guide”.

Today I want to speak about Rental Yields so you will have a better understanding of what you need to consider before buying an investment property. After reading this article you will be able to check by yourself your return of investment (ROI). Since some agents might promise you returns that are not going to happen it is a good idea to check them by your own. You will then realize if a broker tells you the true or not and when it is time to walk out the door.

Please write us if you have any question and enjoy the reading. We look forward to hearing from you!

Stefano Bertoli

What are rental yields and why are so important?

Rental yields are probably the most important investment metric used by property owners investing in residential property. It is an indication of the level of return on an investment. You do not want to invest your money in a product without knowing the potential profit – do you?

How to calculate a gross rental yield

The rental yield is calculated by measuring the yearly gross value of rent income as a percentage of the underlying capital value of the buy-to-let investment.

Example: A 2 bedrooms apartment in San Francisco (a popular neighbourhood in Panama) valued at $200,000, generating an annual rent of $18,000 would therefore have a gross rental yield of 9%. This gross rental yield is a useful starting point in calculating your potential return of investment (ROI) and helps give a property owner a quick and easy metric by which to measure it against alternative property or other form investments.

However, gross rental yields don’t tell us the full story. Any landlord will tell you that, unfortunately, they don’t get to keep all the rent. Therefore a more accurate figure of the true cash return from the rental property is given by its net rental yield.

The net rental yield strips away the associated costs of generating the rental income. This might include any management charges, such as: letting agent fees, property management, service charges, repair costs, insurance charges and mortgage.

How to calculate a net rental yield

An examination of this property in San Francisco shows that the expenses come in at around 20% of the total rent (10% Property Management, 10% maintenance and vacancy costs). Therefore applying this figure to my previous example would mean that the gross rent of $18,000 becomes a net rent of $14,400 (I did not consider property and income taxes as there are exemptions and each individual has different financial and tax payments situations). This results in the gross rental yield falling from 9% to 7.2% which still remains a very good profit!!!

What is a good rental yield?

In my opinion the types of rental yield that a landlord should be looking for will depend on the type of investment property they are looking at, and where they are looking to buy. As a  rule of thumb and in the current economy and house market environments (2015) I would say a property owner in Panama should be looking for a gross yield of about 8-10%.

The general rule with single lets, is the larger the property the lower the relative gross yield. Conversely, a studio flat in Panama City is likely to potentially draw in a higher yield. Panama City will have the higher yields as will prime property location anywhere in the country.

A good example is to compare San Francisco (a neighbourhood in Panama City) with Coronado (a beach location) where rental price - property costs are similar to San Francisco and rental price in Coronado can be even higher. The bad things about beach locations is that even if properties can generate higher yields if rented for a full year you need to consider that apartments can stay vacant for a longer time and it is more difficult to find a tenant willing to stay for a period of at least 6 months when compared to the city.

If a landlord is looking a purely income and prepared to look purely for a cash cow (steady return of profits), it should be entirely possible to obtain a gross yield above 8%. With rents once again rising and property prices looking as if they may perform a bit lower for some time (2015), landlords need to switch focus to rental yields and not property price increases.

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