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How important is rental yield when investing?

When it comes to buying investment property, is rental yield the solid indicator that reflects the strength of your investment? Or is it another statistic that can mislead or misrepresent the potential of a property?

If you’re looking for investment property, consider rental yield as one tool in your kit, albeit an important tool. It indicates the possible annual return on investment, over time, in comparison to the purchase price. This is very common in Dubai as most investors are on the look out for high net yielding properties.

Rental yield is calculated thus:

Annual Rent / Price of property

So the yield on a typical investment property is calculated thus:

AED 45,000/ 500,000 = 9%

This is what we call Gross Yield. However, because it doesn’t include a host of other variables, such as services charges, chiller fees, cost of repairs, depreciation, insurance, property management, and rates, investors should not look to yield to determine whether a property will be either positively or negatively geared. This can only be achieved through developing a cash flow projection to produce a true net yield.

Neither does the yield figure indicate or factor in possible capital growth. In fact, on many occasions, a property with high yield will be likely to offer low capital growth overtime and visa-versa (although there are exceptions).

To give an international example, many investment properties in Australian mining areas are currently offering yields of over 8%, however the prospect of long-term capital gain – which what ultimately investors are seeking – is slim. In Dubai, the same can be seen in International City properties. Good net yield with little capital growth.

On the way to choosing an investment property, a high yield is important, but not to be used in isolation when making the decision.

The best pick when it comes to investment property is a high yield dwelling in an area that promises capital gains. Add to it low maintenance costs and a great Property Manager and you have the full package!

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