Rental yield is an important term to understand for anyone looking to invest in property. It tells you how much you can earn annually from renting out a property, expressed as a percentage of the property's value. Let’s break it down further and see how rental yields differ in urban and rural areas.
What is Rental Yield?
Rental yield is the percentage return on the investment you make by renting out a property. It is calculated by dividing the total annual rent by the property's value and then multiplying by 100.
Formula:
Example: If you buy a property for ₹50 lakh and you earn ₹2 lakh per year in rent, your rental yield is:
Key Factors Affecting Rental Yields
There are a few things that affect rental yields in both urban and rural areas. These include demand for rental properties, property prices, and potential rental income.
1. Demand for Rent
- Urban Areas: Cities with a lot of job opportunities and good infrastructure (like Mumbai, Delhi, and Bangalore) tend to have high demand for rental properties. More people are moving into cities for work, education, or better living standards, which means landlords can charge higher rents and earn better rental yields.
- Rural Areas: Rural areas usually have less demand for rental homes. People tend to stay in these areas because of lower job opportunities, so rents are lower. As a result, rental yields in rural areas are typically lower than in urban areas.
2. Property Prices
- Urban Areas: In cities, the cost of property is generally higher due to limited land availability and greater demand. For example, buying a house in Mumbai might cost ₹1 crore, but you can charge ₹30,000 to ₹50,000 per month in rent. Even though the property cost is high, the rental yield could still be decent.
- Rural Areas: In rural locations, properties are more affordable. For instance, you could buy a house in Hosur for ₹15 lakh. While this lowers your initial investment, the rent you can earn is also lower, which results in modest rental yields.
3. Rental Income Potential
- Urban Areas: Cities typically provide higher rental income because demand is strong. In places like Hyderabad or Chennai, areas close to business hubs and educational institutions can command higher rents. For example, a 2BHK apartment in Hyderabad could rent for ₹30,000–₹40,000 per month.
- Rural Areas: Rental income is generally lower in rural areas. For example, in towns like Tiruvannamalai, a 2BHK house may only earn ₹6,000 to ₹8,000 a month in rent. The low rent translates to lower rental yields.
Rental Yield Comparison: Urban vs. Rural Areas
Let’s take a look at how rental yields compare in urban and rural areas.
Urban Areas: Higher Rental Yields in High-Demand Zones
- High Demand: In cities, especially in business hubs, there’s a continuous flow of people looking for rental properties. For example, Bangalore and Chennai are always in high demand because of job opportunities and educational institutions.
- Higher Rent Prices: Due to higher demand, rental prices are also higher in urban areas. A property near popular locations like OMR in Chennai or MG Road in Bangalore can charge higher rents, which helps boost rental yields.
Rural Areas: Lower Investment with Modest Returns
- Lower Demand: In rural areas, there’s less demand for rental properties. People tend to stay in rural areas for the local economy (agriculture or small businesses), but they don’t usually move there from other places.
- Affordable Property Prices: Properties in rural areas are generally much cheaper compared to cities. A 2BHK house in Madurai may cost ₹15 lakh, but the monthly rent may only be ₹6,000–₹7,000. This lower rent results in modest rental yields of around 2%–3%.
Urban Areas: Investment with Better Returns
1. Economic Growth and Job Opportunities
Urban centers like Mumbai, Delhi, and Hyderabad offer more job opportunities and have booming industries. This leads to high demand for rental properties in those areas, which means investors can charge more rent and get higher rental returns.
- Example: Areas like Banjara Hills in Hyderabad have high demand from young professionals working in nearby IT hubs. This makes it a great place to invest in rental properties for higher yields.
2. Better Infrastructure and Amenities
Urban areas have more developed infrastructure, like public transport, hospitals, schools, and shopping centers. These amenities attract people to rent in cities. Higher rental yields can be expected in places where people are willing to pay extra for convenience.
- Example: In Chennai, areas close to the IT corridor are in high demand. Rent prices can be ₹40,000 or more per month for a 2BHK apartment in these parts.
Rural Areas: Lower Returns but Lower Investment
1. Lower Demand for Rentals
Because there are fewer job opportunities and fewer people moving into rural areas, there’s less demand for rental properties. This results in lower rents and modest rental yields.
2. Affordable Property Prices
The advantage of rural areas is that property prices are low. You can buy a property for a fraction of the cost in cities, making it an attractive option for those looking to invest at a lower cost. However, the trade-off is that rental income will be much lower.
Urban vs. Rural - Which is Better for Investment?
- Urban Areas: Best for Higher Rental Yields
- If you’re looking for better returns, urban areas are a great choice. The demand for rental properties in cities like Mumbai, Chennai, and Bangalore means that you can charge higher rents, resulting in better rental yields, despite higher property prices.
- Rural Areas: Affordable but Lower Returns
- Rural areas are ideal for those who have a smaller budget and want to buy property at a lower price. However, rental yields will be lower since the demand for rentals is limited, and rent prices are modest.
Ultimately, the decision depends on your budget, risk tolerance, and investment goals. If you’re looking for higher returns and are ready to invest in higher-priced properties, urban areas will be the best bet. But if affordability is your primary goal, rural areas offer more budget-friendly options, even though the rental yield will be lower.