Rental Yield: A Worked Example of Gross Versus Net

The advertised yield and the yield you actually receive are different numbers. A calculation showing where the gap comes from.

Rental yield is quoted constantly and calculated carelessly. The gross figure is easy and almost useless; the net figure requires arithmetic and is the only one that tells you what the asset does for you.

The situation

An investor is considering an apartment offered at a price with an advertised rental income. They want to know the actual return after the costs of owning and operating it.

Assumptions (illustrative)

• Purchase price: SAR 850,000.
• Assumed transaction and registration costs: SAR 25,000.
• Assumed initial repairs and furnishing: SAR 30,000.
• Assumed annual rent: SAR 55,000.
• Assumed vacancy: 1 month per year.
• Assumed annual service charges and maintenance: SAR 9,000.
• Assumed property management fee: 5 per cent of collected rent.
• Assumed annual insurance and sundry costs: SAR 2,500.

Step 1: Gross yield as advertised

SAR 55,000 divided by SAR 850,000 equals 6.5 per cent.

This is the number in the advertisement. It assumes full occupancy, no costs and no acquisition expenses, none of which are true.

Step 2: True capital invested

SAR 850,000 plus SAR 25,000 plus SAR 30,000 equals SAR 905,000.

Return should be measured against what you actually committed, not against the headline price.

Step 3: Collected rent after vacancy

SAR 55,000 multiplied by eleven twelfths equals approximately SAR 50,400.

One vacant month is a modest assumption. Between tenancies there is usually a gap, and it recurs.

Step 4: Operating costs

SAR 9,000 plus 5 per cent of SAR 50,400, which is SAR 2,520, plus SAR 2,500, giving SAR 14,020.

These costs continue whether or not the unit is occupied, which is why vacancy hurts twice.

Step 5: Net income

SAR 50,400 minus SAR 14,020 equals SAR 36,380.

This is the money that actually reaches you in a normal year, before any financing cost.

Step 6: Net yield on capital invested

SAR 36,380 divided by SAR 905,000 equals approximately 4.0 per cent.

The advertised 6.5 per cent becomes about 4.0 per cent. Neither number is dishonest; they simply measure different things, and only one is yours.

What changes the answer

• Two vacant months instead of one reduces net income by roughly SAR 4,600 and the yield by about half a percentage point.
• A major repair such as replacing air conditioning units can absorb a significant share of one year's net income.
• If the purchase is financed, the financing cost is deducted from this net income, and the return on your own equity is a separate calculation.
• Rent growth or decline over time changes the picture more than small differences in the initial yield.

What the numbers tell you

• Measure return against total capital committed, including transaction costs and initial works.
• Assume vacancy rather than full occupancy, because vacancy is normal.
• Include management, service charges, insurance and a maintenance allowance every year.
• Compare properties on net yield, since gross yield tells you nothing about the cost of operating the asset.

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.

If you are buying, selling or investing, Domira can verify the documents, assess the property and build the numbers with you before you commit to a transaction.