Pricing a Rented Building for an Institutional Buyer: A Worked Yield Example

An illustrative SAR calculation showing how net operating income and a required yield set the price of a completed building, and what small changes do to the figure.

An income buyer prices a building by working out its net operating income and dividing by the yield it requires. This worked example builds that number from gross rent, shows what a one point difference in yield does to the price, and demonstrates how improving occupancy is worth many times its effect on income. All figures are illustrative assumptions.

The situation

You own a fully built 24-unit residential building let on individual tenancies and are considering a sale to a professional investor rather than selling apartments one by one. You want to understand how the buyer will arrive at a number, so you can decide what to fix before going to market.

Assumptions (illustrative)

• Gross potential rent assumed at SAR 48,000 per apartment per year, so SAR 1,152,000 across 24 units.
• Vacancy and bad debt combined assumed at 7 per cent of gross potential rent.
• Operating costs not recovered from tenants assumed at SAR 300,000 per year, covering management, maintenance, insurance and common utilities.
• A buyer requiring a yield of 7.5 per cent, and an alternative buyer requiring 8.5 per cent.
• Selling costs assumed at 1.5 per cent agency plus SAR 60,000 of legal and documentation costs.
• The Real Estate Transaction Tax published headline rate is 5 per cent, to confirm with ZATCA, and who bears it is a matter for the contract.

Step 1: Start from gross potential rent

Twenty-four apartments at SAR 48,000 per year gives gross potential rent of SAR 1,152,000.

This is the ceiling, not the income. Every deduction from here is something a buyer will examine in the tenancy schedule and the collection record.

Step 2: Deduct vacancy and bad debt

At 7 per cent, the deduction is SAR 80,640, leaving effective rental income of SAR 1,071,360.

A buyer sets this percentage from your actual history, not from your ambition. Two years of clean collections is worth real money at this line.

Step 3: Deduct the operating costs you cannot recover

SAR 1,071,360 less SAR 300,000 of non-recoverable operating costs gives net operating income of SAR 771,360.

What is recoverable from tenants and what is not is decided by your documentation. Weak service charge arrangements move costs onto the owner and reduce the income being bought.

Step 4: Capitalise the income at the required yield

At 7.5 per cent, value is SAR 771,360 divided by 0.075, which is SAR 10,284,800. At 8.5 per cent it is SAR 771,360 divided by 0.085, which is about SAR 9,074,824.

One percentage point of yield is worth about SAR 1,210,000 on this building. That is why the quality of the tenant profile, the documentation and the condition matters more than most owners expect.

Step 5: Test what improving occupancy is worth

Reducing vacancy and bad debt from 7 per cent to 4 per cent adds SAR 34,560 to net operating income. At a 7.5 per cent yield that raises value by 34,560 divided by 0.075, which is SAR 460,800.

Three points of occupancy improvement is worth roughly thirteen times its annual income effect in capital value. Six months of disciplined letting and collection before going to market is the highest return work available.

Step 6: Calculate what actually reaches you

At the SAR 10,284,800 price, agency at 1.5 per cent is SAR 154,272 and legal costs are SAR 60,000, leaving about SAR 10,070,528 before any transaction tax treatment and before repaying any facility secured on the asset.

The number to compare against your alternatives is the net figure after costs and after debt repayment, not the price on the contract.

What changes the answer

• If non-recoverable operating costs are SAR 350,000 rather than SAR 300,000, net income falls by SAR 50,000 and value at 7.5 per cent falls by about SAR 666,667.
• If leases expire within a few months of the sale, a buyer may apply a higher yield or a specific deduction for re-letting risk.
• If some tenancies are undocumented, a buyer may exclude that income entirely rather than discount it.
• A single long lease to a strong tenant can attract a lower yield than many short residential tenancies.
• Outstanding maintenance or missing certificates typically appear as a price deduction rather than a yield adjustment.

What the numbers tell you

• Net operating income, not gross rent, is what an income buyer is purchasing.
• A point of yield is worth far more than a year of rent, so evidence and condition matter more than presentation.
• Improving occupancy and collections before a sale is capitalised into the price many times over.
• What is recoverable from tenants is a documentation question with a direct effect on value.
• Always compare exits on net proceeds after selling costs, tax treatment and debt repayment.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.