Real estate investment maintains its position as one of the safest earning methods of the 21st century. Real estate, which is the first choice of many investors, brings great success to the investor if the right choices are made. Of course, since many factors change the dynamics in the real estate world, not every real estate investor is equally profitable. Some real estate investments are low-yielding. In this article, we will talk about low-yield real estate investments in detail.
Before moving on to low-yield real estate investment, it is useful to define the yield. If you are considering buying an investment property, you are probably interested in what the property will bring you, namely yield.
Before seriously considering a property and adding it to your list, most investors first calculate the property's yield. It is a measure of the future income of an investment. When buying a property, many investors focus on its current and potential yield.
Real estate yield is a measurement of the future income of an investment. It is usually calculated as an annual percentage based on the asset's cost or market value. This has nothing to do with capital gain.
At this point, it is useful to explain another concept: Net yield. In real estate, the net yield is the income from an investment after expenses are deducted. Costs and expenses include purchase and transaction costs such as stamp duty, legal fees, inspections, loan fees, advertising, and rental fees lost due to vacancy.
There may also be maintenance and repair costs, management fees, and insurance costs. It is not possible to know the exact amount of these costs in advance, and it is necessary to make predictive plans.
Yield is based on rental income only. Buying and renting an apartment or shop is an example of a low-yield real estate investment. Although buying low-yield real estate doesn't sound very good, it can be profitable for you in some cases. In fact, sometimes prices rise faster with these types of properties, unlike many other property types. If the market goes bad, low-yield properties will lose less value and their prices will recover faster than a high-risk and high-yield investment. Therefore, low-yield real estate can provide you with an advantage in risky periods.
How is the Yield Calculated?
You can follow the steps below to calculate the yield as a percentage.
1. Subtract the ongoing costs of the property and any rental fees you lose while it is vacant from the property's annual rental income.
2. Divide the number you got in the first step by the property value.
3. Finally, multiply the number you got in step two by 100.
To calculate the net yield: Annual rental income (rent per week x 52) – annual expenses and costs/ property value x 100