Pathetic Returns? Gross vs Net Rental Yield in SA
Gross rental yield is annual rent divided by the purchase price, before any costs. Net rental yield subtracts rates, levies, insurance, maintenance, vacancy and management first. Adverts almost always quote gross. Net is the figure that pays you, and it's usually a lot lower.
Twelve percent yield, says the advert.
They aren't technically lying. That number is true. It's just not the money you'll ever get.
What is gross rental yield?
Gross yield is the simplest sum in property.
Annual rent ÷ purchase price × 100.
A property bought for R1,000,000 that rents for R10,000 a month brings in R120,000 a year. R120,000 divided by R1,000,000 is 12%.
That's the number on the advert. It's before anything happens to the rent.
How do you calculate net rental yield?
Net yield takes the costs out first.
(Annual rent − annual costs) ÷ purchase price × 100.
Here's the same property, with illustrative costs. These are assumptions to show the method, not figures for any real property.
- Rent: R120,000 a year
- Rates: R9,600
- Levy: R18,000
- Insurance: R3,600
- Maintenance reserve: R10,000
- One month empty: R10,000
- Letting agent: R12,000
Costs: R63,200. What's left: R56,800.
R56,800 ÷ R1,000,000 = about 5.7%.
Twelve became under six. And that's still before the bond.
Get the structure right first. The Directors Fortress is the step-by-step for buying property in a company name. R99 once off. Start here → zahomes.co.za/start-here
Which costs do adverts leave out?
Nearly all of them. A gross yield ignores:
- Rates and taxes
- Levies, on sectional title or estate property
- Insurance
- Maintenance and repairs
- Vacancy. No rental is let twelve months of every year, forever
- Letting and management fees
- Bond interest
Some adverts go further and use a hoped-for rent instead of the current one. Always ask what the unit rents for today, with a lease to prove it.
What about the bond?
Net yield tells you how the property performs. It doesn't tell you what lands in your account, because most investors borrow.
So there's a third number. Cash flow. Net income minus the bond repayment. That's what's left, or what you have to top up, each month.
A property can have a decent net yield and still cost you money monthly if the bond is large. That isn't always wrong. It should be a decision, though, not a discovery.
What is a good rental yield in South Africa?
There isn't one number, and I'd be cautious of anyone who gives you one.
It depends on the area, the property type and interest rates. A useful test is simpler. Does the net yield beat the cost of the money you borrowed to buy it? If the property earns less than the interest rate on its bond, the rent alone isn't covering the finance, and you're relying on growth.
Gross, net and the number nobody mentions
There's a number after net. Call it what you get to keep and use.
Even a real, honest net yield only compounds if you can buy the next property. In your own name, the bank decides when that happens, based on your payslip, not on how good your first property is.
A great yield in the wrong container is a great yield you can only have once.
How should you use yield when comparing deals?
- Use gross to filter quickly. It's fine for throwing out obvious non-starters.
- Use net to decide. Never offer on a gross number.
- Use the same cost assumptions for every property you compare. Otherwise you're comparing your optimism, not the deals.
- Check the rent yourself. Look at what similar units are let for, not advertised for.
The three checks I run before I even walk inside are in how to analyse a rental property.
The catches
- Yield ignores growth. A low-yield property can still do well if its value rises. That's a bet, not income.
- Costs are estimates until you've owned it for a year.
- A high yield often signals higher risk. Harder areas, harder management, more vacancies.
- Tax isn't in these sums. Rental profit is taxable.
- Illustrative numbers aren't yours. Run your own.
Where the company fits
Yield is about the property. The company is about what you can do with it.
Inside a company the bank also weighs what the property earns, so a well-performing property helps your next application instead of only counting against it. Running the numbers like a pro is a full section in The Vault. Start with the container first.
FAQ
What is the difference between gross and net rental yield?
Gross yield is annual rent divided by price, before costs. Net yield subtracts running costs first, so it's lower and more realistic.
How do I calculate rental yield in South Africa?
Divide annual rent by the purchase price and multiply by 100 for gross. Subtract annual costs from the rent first for net.
Is a 10% rental yield good?
It depends whether it's gross or net and what the costs are. A 10% gross yield can be a much lower net yield.
Does rental yield include bond repayments?
No. Yield measures the property. Subtract the bond from net income to get your monthly cash flow.
Should I use purchase price or current value for yield?
Use the purchase price plus buying costs when assessing a deal. Use current value to judge how a property you own is performing.
Related reading
- 3 numbers to check before you buy a rental
- Sectional Title Levies: What They Do to Your Yield
- Is Your Rental Property Actually Profitable?
Get the foundation right
The Directors Fortress gives you the investor-friendly offer to purchase, the blueprint for registering the entity, and a walkthrough of the structure I use. R99 once off, yours to keep.
Get started → zahomes.co.za/start-here
This article is general information, not tax, legal or financial advice. Speak to a registered tax practitioner, attorney or financial adviser about your own situation.
Sources
- Rental Housing Act 50 of 1999
- South African Reserve Bank: resbank.co.za
About the author
Michael Bowen is the co-founder of ZAHomes. He has invested in property for over 20 years, in South Africa and abroad, and teaches investors how to buy and hold property inside a company. His philosophy: an investor's greatest assets are the lessons from their failed deals.
