UNDERSTANDING THE CONCEPT OF RENTAL YIELD
Are you contemplating the idea of owning a property in Thailand with the intention of renting it out? If so, you may be wondering about the best method for determining the potential returns on your investment.
One of the most straightforward ways to evaluate your profits is to avoid the common confusion between the concepts of Capital appreciation and rental yield – these are fundamentally different.
Understanding Capital Appreciation:
Capital appreciation is the increase in the market value of your property over time due to factors such as location, population growth, and overall market trends. The principle of supply and demand plays a crucial role here. When you invest in land, commercial spaces, or residential properties in a growing market, you can benefit from the property’s value appreciation over time.
For instance, if you purchase a property for ฿5,000,000 now, and you anticipate a 3% annual growth in that area, you could reasonably expect a minimum capital appreciation of at least 3%. The right location could further enhance this appreciation rate.
It’s important to remember that this scenario doesn’t involve any incoming cash flow; it’s purely about the appreciation in the asset’s value. As the saying goes, “land is a finite resource,” which means that as the population increases, the demand for places to live and invest will also rise. If you do your research and choose wisely, you’ll experience the benefits of capital appreciation. When you decide to sell, you can utilize the services of a proficient real estate broker to ensure the best possible return.
The First Steps:
If you’re venturing into property investment, you may have encountered the term “rental yield.” This term refers to the annual return you can expect from your property, which is essential for assessing potential income and cash flow. This is particularly significant if you’ve taken out a loan to finance your property purchase.
Your first consideration should be your loan’s interest rate. If it exceeds 5 – 6%, remember that this will form part of your repayment obligations. To boost your earnings, aim to have a deposit larger than the bank’s requirement, as this can be used to negotiate better interest rates. If you represent a low risk to the bank, you have a better chance of obtaining a lower interest rate.
If you plan to buy the property under your Thai spouse’s name, ensure that you’ve built a significant deposit over time to establish credibility with the bank.
In the ideal case, the highest returns come from outright cash purchases of property. When buying with cash, don’t forget to budget for ongoing costs like maintenance, taxes, and common fees, and then sit back and enjoy your rental income.
What Rental Yield Should I Expect?
Rental yield is the income generated from an investment property as a percentage of its associated costs. Understanding how to calculate rental yield and what it means for you both legally and financially is crucial.
How Do I Calculate Rental Yield?
Rental yield can be categorized into two types: gross and net. Both calculations require understanding:
Gross Rental Yield:
To calculate the gross rental yield, you need the annual rental income and the property value. Here’s the formula:
Gross rental yield = (Annual rental income / Property value) x 100
Remember that gross rental yield does not account for any property-related expenses. Hence, a high rental yield might be offset by high costs, resulting in a low net rental income.
Net Rental Yield:
Net rental yield, on the other hand, gives a more accurate forecast of rental return. This calculation includes all known and estimated costs and expenses related to the property, such as purchase and transaction costs, ongoing fees, vacancy costs, and more.
Net rental yield = {(Annual rental income – Annual expenses) / Total property cost} x 100
Take, for instance, a property purchased for ฿3,900,000 with a monthly rental income of ฿15,000. If the total cost of acquisition is ฿4,200,000 (including taxes, legal fees, and more), and the annual expenses are ฿45,000, the net rental yield would be 3.21%. This is notably lower than its gross rental yield of 4.61%, which may significantly impact your evaluation of the property’s worth.
The more variables included in the calculation, the more accurate the final rental yield figure will be. However, accurately estimating all related expenses can be challenging. It’s also important to beware of pitfalls in the property investment market, such as rushed sales, misinformation, and dubious title deeds. To obtain a more precise understanding of properties for rental yields and capital growth, consider consulting with a seasoned real estate agent or legal expert.
How Important is Rental Yield?
Rental yield is a valuable tool for determining the potential value and return of an investment property. However, it’s worth noting that gross rental yield isn’t a very reliable indicator, as it doesn’t account for costs and expenses. Net rental yield, on the other hand, is often based on assumptions and factors beyond your control (like vacancy periods, interest rates, and maintenance costs), which can greatly impact the rental return.
While rental yield is a useful metric, it should be used in conjunction with other key factors like location, potential capital gain, and aspect when assessing the overall return and value of an investment property. If you have a loan, your rental yield needs to cover your repayments and still turn a profit.
It’s also important to consider the current interest rates on deposits and loans. Conduct thorough research to determine if purchasing a rental property is a sound investment, particularly when interest rates are low. If bank rates are low, you might want to consider buying land or a property in an area with positive growth potential.
The bottom line is that the real estate market offers various opportunities, and leveraging the expertise of a professional real estate agent can help you make the best decision for your situation.
Disclaimer:
The information above serves as a general guideline and should not be the sole basis for your investment decisions. Always seek advice from legal, accounting, and professional consultants to ensure you’re fully informed about the current real estate environment.
