Rental yield is a way to compare the income from a property with the money tied up in it.
The useful distinction is between gross yield and net yield.
Gross rental yield
The basic formula is:
Annual rent ÷ property price × 100
If a property costs KES 10 million and collects KES 80,000 per month:
Annual rent is KES 960,000.
Gross yield is:
960,000 ÷ 10,000,000 × 100 = 9.6%
That is a gross figure. It ignores expenses and vacancy.
Use collected rent, not perfect occupancy
If the building has vacant units or persistent arrears, using the maximum possible rent overstates performance.
Start from rent that is actually being collected or use a conservative occupancy assumption.
Net rental yield
A more useful formula is:
Annual rental income minus annual property expenses ÷ total acquisition cost × 100
Expenses can include:
- management
- repairs
- insurance
- rates
- common utilities
- security
- cleaning
- vacancy
- taxes
Total acquisition cost can include the purchase price plus transaction costs and immediate work needed to make the property rentable.
Example
Assume:
- purchase and acquisition cost: KES 10.5 million
- collected annual rent: KES 960,000
- annual operating expenses: KES 210,000
Net income is KES 750,000.
Net yield is:
750,000 ÷ 10,500,000 × 100 = 7.14%
That tells a different story from the 9.6% gross yield.
Yield is not the whole investment case
Also consider:
- condition of the building
- concentration of tenants
- future repair costs
- financing
- legal status
- liquidity
- whether rents are sustainable
A high advertised yield can simply be compensation for higher risk.
When comparing a property’s yield with other investments, compare risk, liquidity, taxes and costs rather than the headline percentage alone. Baini’s guide to Treasury bills explains how short-term government bills work and where their return comes from.
For the checks behind the numbers, see buying rental property in Kenya.