Why rental yield is often misunderstood by homebuyers

Rental yield is the number most often quoted when a flat is pitched as an investment. The figure you hear is almost always the gross yield, and the rent that actually reaches your bank account works out lower.

Gross yield and net yield

Gross yield is a year's rent divided by the purchase price. A flat bought for ₹50 lakh that rents for ₹3 lakh a year has a gross yield of 6%.

Net yield is the same sum after you subtract what it costs to own and let the flat: property tax, society maintenance, repairs, any management or brokerage fee, and the months it sits empty. As a rough guide, net yields in cities like Hyderabad often come out 1-2 percentage points below the gross figure.

The price in that calculation should be your full cost, including registration and interiors. Using the base price makes the yield look better than it is.

Vacancy and upkeep

No flat is let for twelve months every year. Each time a tenant leaves you lose a few weeks of rent, and usually pay for painting and small repairs before the next one moves in. One empty month takes away about 8% of that year's rent.

In a gated community or a high-rise the owner pays for the shared amenities too. Lifts, landscaping, security and the clubhouse are billed to you every month, and in an empty flat the whole bill is yours. Check who pays maintenance under the rental agreement, since it changes the sum a good deal.

Where rental income works

• Location. Areas close to IT offices or colleges tend to have steady tenant demand, which keeps vacancies short.
• Size. Smaller flats, such as studios and 1 or 2 BHKs, usually earn more rent for each rupee of purchase price than large luxury units.
• Tenant. Company leases and student lets tend to be more predictable, with fewer late payments.
• Management. If you live in another city, a paid property manager can keep the flat in shape and shorten the gaps between tenants. Count the fee as a cost.
• Price. Do not pay more for a flat because of the rent the seller says it will fetch. Check what similar flats in the same building are let for today.

A quick way to check a claim

When someone quotes you a yield, ask for the monthly rent it assumes. Multiply by eleven instead of twelve to allow for an empty month. Subtract a year's maintenance and property tax, plus something for repairs. Divide what is left by everything you will pay for the flat. The answer is the number to compare against your home loan rate and against what the same money would earn elsewhere.

Rent alone rarely justifies buying a flat in Indian cities. Most of the return, when there is one, comes from the price going up, and that is harder to predict. If the purchase only makes sense on the gross yield, we would not go ahead with it.

If you would like the numbers worked out for a project you are considering, book a call with a relai advisor.