Rental yield optimization in the UAE
Discover which factors you should consider in order to optimize the rental yield of your investment property in the UAE.
Terminology you need to know
There are two ways in which you can reap the benefits of an investment property:
Rental yield - the income you receive from renting the property out
Price appreciation - the increase in value of the property since your initial purchase
You’ll start receiving profit from renting out your property pretty much right from the beginning (depending on your rental situation) and you’ll continue to benefit from rental yield as long as you own and rent the property. On the other hand, you’ll see the benefits of price appreciation when you go to sell the property. Luckily for investors, prices across the UAE have seen significant increases in recent years, reaching all-time highs in the Dubai residential market. The level of price appreciation largely depends on market conditions, development plans, and supply/demand at the time of sale. In this article, we’re focused on rental yield since it has a much more immediate effect on the return from your investment property.
There are two ways to calculate rental yield:
Gross yield - the overall return on investment without considering taxes or expenses
(annual rental income / purchase price) x 100Net yield - the return on investment taking into account taxes and expenses
[ (annual rental income - outgoing costs) / purchase price ] x 100
Net yield is generally the preferred measure since it calculates the annual profit you’ll receive from an investment property. It considers the outgoing costs that you should budget for including, but not limited to, mortgage payments, agent fees, insurance, repairs, service charges, etc. Return on Investment (ROI) is another term that’s equivalent to the net yield if you’re financing the investment with your own cash (and not through a mortgage loan).
What influences rental yield?
As an investor, considering your prospective rental yield is one of the most important things to do before buying a property. Rental yields already tend to be higher in the UAE thanks to lower prices per square foot and favorable tax conditions. However, you should still consider the return on investment that you’ll see with each property in order to make the smartest financial decision and anticipate the profit you can expect. Let’s look at the major factors that influence rental yield, including location, property type and size, amenities and services, rental length, and level of involvement.
Location
The location of your property can drastically affect how large of a rental yield you can get. In general, rental demand will be higher in more central locations and thus you’ll be able to set your rental prices higher. To optimize your rental yield, you should look for properties that are close to the center or downtown of a city or are otherwise located in a highly desirable area. In general, look for properties that are close to public transport stations, restaurants, shops, fitness centers, parks, schools, etc. It can be extremely helpful to talk with a real estate expert that has knowledge of the locations with the highest rental yields.
Property type and size
While you may think that going for the biggest and fanciest property will give you the greatest rental profit, you may want to think again. In many cases, smaller apartments often provide the largest ROIs as more of the population can afford to rent them (leading to higher rental demand) and the service charges will be lower. Especially when considering property type and size along with location, it can be much more profitable to invest in a smaller property that’s in a more central location. Smaller units will also usually sell more quickly when you eventually want to sell the property and reap the benefits of price appreciation. Take the time to consider studio and 1-bedroom properties – they just might surprise you.
Amenities and services
Service charges are recurring annual fees that property owners must pay for property maintenance and the upkeep of common areas in the building/community. They can significantly affect the net yield of your property. Service charges typically cover amenities, maintenance, cleaning, security, landscaping, utility services, management services, insurance, air conditioning, and general upkeep. Some amenities that may be provided are reception, balcony, parking, Wi-Fi, elevator, gym, pool, spa, room service, and more.
In Dubai, service charges are applied to all properties and charged per square foot, typically between 3 and 30 AED per square foot. Villas and townhouses often have an extra master community fee. You can learn more about homeownership service charges in our dedicated blog. Overall, you want to weigh the service charges for your potential investment property against the benefits and rental appeal that they offer.
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Rental period length
Whether you seek short-term or long-term rentals can affect your rental profit. Short-term rentals are typically rented for 90 days or less with payment options either monthly, weekly, or daily, whereas long-term rentals are leased for one year or longer with yearly or quarterly payments. They each have their pros and cons, but short-term rentals typically have returns 20-40% higher than long-term rentals. With short-term rentals, you’ll also see accelerated returns during periods of high demand. On the other hand, long-term rentals provide you with a more stable rent and generally have lower maintenance costs. Both short-term and long-term rentals can be profitable investment options if they are well-managed and maintained.
Your level of involvement in the process
Many investors want to receive a high rental yield but avoid the stress and hassle of actually managing their rental property. If this is the case for you, you can consider projects with guaranteed returns in Dubai. These types of projects are most often offered by hotel developers and give investors a fixed percentage return (3-10%) based on the purchase price that is guaranteed over a set period of time (3 to 12 years).
While projects with guaranteed returns can be a great option, the specific terms, conditions, and fees can vary depending on your contract with the developer. These properties may have a higher purchase price and additional service charges regarding property management, and it’s also important to keep in mind that the return isn’t guaranteed indefinitely. It’s certainly possible that you’ll continue to see similar returns after the fixed period, but the revenue is usually then shared among all of the hotel’s investors and can be more unpredictable.
Alternatively, you could opt to manage your rental property by yourself. This would help you minimize your outgoing costs, but would also require a good understanding of the UAE real estate market. Or you could seek the help of a real estate agency to manage your property. Each real estate agency will have its own specific management service costs.
Summarizing table
Here’s a table that summarizes the general rules regarding how these factors affect rental yield. Since these factors are interconnected, these rules may not hold true for all properties.
Lower rental yield | Higher rental yield | |
|---|---|---|
Location | Non-central | Central or downtown |
Property type / size | Larger properties with a greater number of bedrooms | Smaller properties (apartment studios or 1-bedrooms) |
Amenities / services | More amenities and services | Fewer amenities and services |
Rental length | Long-term rentals | Short-term rentals |
Level of involvement | Zero or low involvement in property management | Greater involvement in property management |
Going forward
It’s clear that there are many factors to consider when it comes to your property’s rental yield, including location, property type and size, amenities and services, rental length, and level of involvement. Our real estate experts at Kredium can help you find a rental property that will provide you with a high rental yield, with our portfolio of over 5,000 properties in Dubai.
If you’re looking to finance your property purchase with a mortgage loan, that can add another layer of complexity to the entire process; however, it’s still very much possible. Using a mortgage calculator is a great starting place to estimate your rental profit and the price of rent you’d need to cover all the costs associated with a mortgage loan. Our mortgage brokers can do the heavy lifting for you, searching loan offers from multiple lenders in the UAE to find a financing option that works for you. All you have to do is register on our website to start getting professional guidance.
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