Rental Yield in India – Price to Earning Ratio in Real Estate

After 1 year of the demonetisation, the real estate prices remain the same, constant as they were in the past two years. But with the RERA getting diluted amidst the states, the builders could regain the lost effect on real estate prices.

Those who buy property as an investment—as different from those who buy to live in it—usually expect a twin benefit: a steady rental income and a rise in value. The ratio of the rental income to the price of the property is the rental yield. 

Gross Rental Yield = (Annual Rental Income / Cost of the Property ) * 100

If you have bought a property for Rs. 12,00,000 (12 Lakhs) and you earn a monthly rent of Rs. 10,000 then your Gross Rental Yield would be

Gross Rental Yield = (10000 * 12 / 1200000 ) * 100 = 10%

The rental yield can also be calculated on the net rental yield which means

Net Rental Yield = ((Annual Rental Income – Property Expenses) / (Cost of Property) * 100

The other expenses include property tax, maintenance cost, no rental period.

In a broader sense, it is calculated w.r.t gross rental yield, as the property expenses vary from place to place.

rental yield calculation
rental yield in India

Earlier were the days when there was the steep rise in property prices and the rental income couldn’t match up with the price. Relatively it is better  now in urban areas when compared with rural India.

Slowly, the Indian market took the uptrend w.r.t the rent making the rental yield a fruitful one for the real estate investors.

If you want to invest in a property, you always look at the location and the appreciation of the property over a longer period or even a shorter period.

It is worth investing in a property whose rental yield is high as you can be relaxed about your source of income.

For example, if you had taken a house ten years back which costed Rs.35lakhs. Now you want to give it for rent. So, in that case you calculate the present price of the property rather than the actual price you had bought for. Which means, it might cost around Rs. 70 lakhs over the ten years now. So, you consider the present price of the property and calculate the rental yield.

Why haven’t rentals kept pace when there was a steep price? It’s not as if there has been a drop in the demand for rented accommodation. Only that property prices have risen too high too fast, and to a lesser extent so has the supply of new houses. In some overheated pockets, such as Gurgaon and Noida near Delhi, the rental yield is down to 2-3%. A luxury condominium costing Rs 1 crore fetches a rent of Rs 20,000-25,000 a month. An independent house priced at Rs 2 crore will bring in Rs 30,000-40,000. The situation was no different in other cities where a large supply of residential housing had just entered the market or was nearing completion. Rental values have risen marginally.

In the stock markets, the dividend yield of a share falls as its price rises. A low dividend yield signals that the share is overvalued. More than the dividend yield, it is the PE (or price to earnings ratio) of a stock that is more widely used to determine a share’s value. Divide the earnings per share (EPS) with the current price of a share to arrive at the PE of a stock. Usually, a high PE means the share is overpriced; a low PE means it is cheap. To some extent. When the stock markets are at an all-time high, the average weighted PE of the 50 shares on the Nifty index is less than 21. It seems unlikely that rentals would move up in a hurry.

A massive stock of houses is under construction in almost every city. Some 245 million sq ft of residential space was ready in just the six metros. A good percentage of these houses were available for rent.

Areas within a city where there is no fresh supply of housing— fully developed areas or those in the central part of cities—continue to see higher rentals. Similarly, there are areas where the location advantage overrides other factors. For instance, an infrastructure improvement (a new bridge, road or train station) can make an area more attractive to those seeking a house on rent. Barring these exceptions, if you plan to buy a house for investment and hope for a monthly flow of income in the form of rent, you are better off checking other investment opportunities.

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