A lot of real estate purchases in Addis are for investment purposes with rental income a strong consideration. Hence, rental yield is a concept all such investors should be intimately aware of.
Simply put, rental yield is a form of expressing a property’s rental income against its market value. It is usually expressed as a percentage and the higher that percentage, the higher your return.
Calculating Rental Yield
While there are several variations of calculating rental yields, we will stick with gross rental yield for now. Essentially, this calculation is the total yearly income you can expect from your property, divided by the market price of the property.
So if the rent for an apartment is $2,000/month and it cost you ETB 25 million to buy, then the gross rental yield would be:
(1,296,000) / 25,000,000 = 5.2%
In most developed markets, this would be considered a pretty good rental yield. In Ethiopia, it is quite possible and common to achieve even better ones—from 6% to 10% and even beyond. Especially if exchange rates more aligned with the market are considered as may be forthcoming in the future.
What type of property should you consider for the best rental yield? You may be surprised at the answer.
Apartments Best for Rental Income
In general terms, it’s not even close. In terms of residential real estate, apartments provide the better rental yields over standalone houses by a wide margin. As mentioned above, apartments can very easily produce rental yields of 5-10% (and even more!). But you will be hard pressed to break even 3% on villas. That’s because the price of a villa you would have to purchase to produce the same rent as an apartment, will be a lot higher than that of the apartment. Probably something in the order of 2-3 times higher. Hence, the enormous gap between rental yields for villas and apartments. So if rental income is a significant factor in your real estate investment considerations, then apartments are the way to go.
We can talk about retail space which can have as good, maybe higher rental yields although there are a lot more variables to consider for that type of space in general.