Rental Yield Deep Dive: Gross vs. Net Yield, Leverage Effects, and Vacancy Risk

Calculating Rental Yield the Right Way

Most first-time investors calculate rental yield too simply:

Flawed calculation: (Annual rent) ÷ Purchase price × 100

This approach misses two critical factors:

1. The tenant deposit effect: A security deposit or prepaid rent reduces your out-of-pocket investment, which changes your effective yield.
2. Debt service costs: If you used a mortgage, interest payments must be subtracted to get your true net return.

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Analyze the real return on investment based on purchase and rental terms.

Purchase Price

Tenant Deposit

Monthly Rent

Loan Amount

Loan Rate (%)

Yield Analysis

Net Yield

6.00%

실제 적립 자본 대비 연 수익률

Monthly Cashflow₩1,250,000

Equity₩250,000,000

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Gross Yield vs. Net Yield

Example: $500,000 property,$150,000 down payment, $350,000 mortgage at 6.5$2,500/month

• Annual gross rent: $30,000
• Annual mortgage interest (year 1): ~$22,750
• Operating costs (taxes, insurance, maintenance ~25%): ~$7,500
• Net income: $30,000 −$22,750 − $7,500 = −$250 (slightly negative)
• Gross yield: 6.0% | Net yield: essentially 0% at these numbers

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The Two Faces of Leverage

When leverage works in your favor: Property value rises AND rental income exceeds debt service

Example: $500,000 property rises 10$50,000 gain on $150,000 equity = 33% return on equity

When leverage amplifies losses: Values drop AND vacancy hits simultaneously

3 months of vacancy → $7,500 in lost rent, mortgage continues Property value falls 10$50,000 loss on $150,000 equity = −33% return on equity

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Hidden Costs That Erode Surface Yield

These costs don’t appear in a simple yield calculation but accumulate significantly over a long hold period:

1. Property taxes: Typically 0.5–2.2% of assessed value annually (varies widely by state and county)
2. Repairs and capital expenditures: Budget 1% of property value per year for maintenance; more for older properties
3. Vacancy: Conservative assumption is 1–2 months of lost rent per year (~8–17% of gross annual rent)
4. Property management fees: 8–12% of monthly rent if you use a professional manager
5. Transaction costs: Buying (3–5% closing costs) and selling (5–6% agent commissions + transfer taxes) take a major bite — only long hold periods can amortize these costs