What is Rental Yield?
Rental Yield or Gross Yield is the annual returns received from renting a property over its market value. It is useful to roughly understand how many years of rental it will take an investment to pay it itself off.
For example, a 10% rental yield, means it will take 10 years for the property to pay itself off; whereas a 5% yield means it'll take 20 years.
Rental/Gross Yield is an annual rate, and professional investors use different tricks to more easier estimate this value without complex calculations, called the 1% Rule and the 2% Rule.
The 1% Rule takes the gross yield (annual), and divides it by 12, to estimate the monthly yield and compare it to the actual market rents that can be collected on the unit. If the market rents are at least 1% of the market value of the property (or 1%), it is a good indicator that it warrants further analysis as a potentially good investment.
For example, a $100,000 property needs to rent for $1,000 or more to pass the 1% Rule. A $250,000 property will need to rent for $2,500 or more each month to pass, and so on.
The 2% Rule is a much more conservative rule, and it is applied mostly to high-risk areas with low Life Quality Index and little growth potential, where tenant turnover and OPEX are potentially much higher than its neighboring areas.