Investment

Rental Yield: How to Calculate It Properly Before You Invest

A practical guide to calculating gross and net rental yield on property in Madinah, including the costs most investors forget.

Many investment purchases are decided on a single sentence: "rents in that district are excellent." But "excellent" is not a number, and the difference between a 4% and a 7% yield is the difference between a mediocre investment and a good one — a difference that becomes stark after ten years.

Gross yield: the quick number

Gross yield = (annual rent ÷ purchase price) × 100. Buy an apartment for SAR 600,000 and rent it for SAR 36,000 a year, and the gross yield is 6%. Useful for comparing two options quickly, but it ignores every cost.

Net yield: the real number

Subtract actual costs from the annual rent:

• Vacancy: assume at least one empty month a year (around 8%) unless demand is exceptional.
• Maintenance: budget 5–10% of rent annually, more for older buildings.
• Management: 5–8% if a specialist handles it.
• Shared services and fees: whatever the contract places on the owner.
• Insurance, where applicable.

Applied to the example: 36,000 less vacancy (3,000), maintenance (2,500) and management (2,200) leaves 28,300. Net yield becomes 4.7% rather than 6% — a material difference, and the one to base a decision on.

Do not forget the cost of entry

The purchase price is not everything you paid. Add commission, transfer fees and the cost of preparing the unit for letting. Including these in the denominator lowers the yield slightly but gives you an honest picture.

Yield is not the whole story

A 5% yield in a district whose values are rising can beat a 7% yield in a stagnant one, because the real return comes from two sources: rent and capital growth. Look at both, and ask whether the district is still growing or has reached its ceiling.

Questions before an investment purchase

• How long does a comparable unit here take to let?
• Who is the likely tenant — family, student, short-stay visitor — and how stable is that group?
• How old is the building and what will five years of maintenance cost?
• Is new supply coming to the district that could push rents down?

A good investment starts with a calculation written before the purchase, not a justification written after it.

Common questions on this topic