When you consider buying a property to let, the first question is what it will earn. Rental yield is the standard measure: the yearly rent as a percentage of what you paid. It is simple, but you have to calculate it correctly and compare like with like.
Gross yield
Gross yield = yearly rent / purchase price x 100.
A flat bought for KES 9,500,000 that rents for KES 960,000 a year has a gross yield of 960,000 / 9,500,000, or 10.1%. Gross yield is quick for comparing listings, but it ignores costs.
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Net yield
Net yield = (yearly rent less yearly running costs) / total amount invested x 100.
The total invested includes the buying costs: stamp duty, legal fees and registration; see the costs of buying property. Running costs include agent fees, repairs, insurance, land rates and vacant months. If the flat above costs KES 520,000 to buy and fit out, the total is KES 10,020,000, and running costs of KES 150,000 leave KES 810,000, so net yield is 8.1%.
Allow for empty months
A property is rarely let for all twelve months. Use a realistic vacancy allowance, such as one month a year, in your rent figure.
Yield after tax
Tax reduces what you keep. Under the flat monthly route, 7.5% of the gross rent goes to KRA. On KES 960,000 of rent that is KES 72,000, which lowers the net yield to about 7.4%. Under the annual route the tax depends on your other income and costs. See monthly rental income tax or annual tax and test your own case in the rental income tax calculator.
Years to pay back
Payback years = total invested / net yearly income. In the example, 10,020,000 / 810,000 is about 12.4 years. This ignores any rise or fall in the value of the property and in the rent.
Comparing properties
The free rental property investment analyser lists several properties side by side and works out the total invested, net income, gross and net yield and years to pay back, so you can compare them fairly. The MRI versus annual rental tax comparison workbook adds the tax.
What a good yield looks like
It depends on the area, the type of property and the risk. Higher yields often come with more vacancies, more management and more risk, while prime areas may have lower yields but better growth. Compare with the return on safer alternatives, and be wary of any figure that seems too good.
Beyond yield
Yield is only one part of the return. Also consider:
- Capital growth in the property's value, and the tax on the gain when you sell; see selling a property: the capital gains tax steps
- Financing costs, which you can test in the loan affordability checker
- Time and effort managing tenants
Keep your numbers honest
Use real figures from your records, not hopes. The records every landlord should keep shows how to collect them, and our guide to the costs of buying property lists the figures to add.
Property markets and tax rules change, and past returns are not a promise. Confirm tax rules with KRA.
Common questions
What is a good rental yield in Kenya? It varies by area and type of property, and there is no single number. Compare the net yield of a property with the interest you could earn elsewhere and with similar properties nearby, remembering that higher yields often come with higher risk or more management work.
Should I use gross or net yield? Gross yield is useful for a quick comparison, but net yield, after land rates, service charge, repairs, agent fees, vacancy and tax, is the figure that tells you what you keep. Use net yield for any serious decision.
Does tax change the yield? Yes. Rent is taxable, so the yield after tax is lower than the yield before it. Whether you pay monthly rental income tax or tax on profit changes the result, so compare both routes.