An Analysis of Rental Yield In India

Rental yield is an important factor for property investors in India, as it directly impacts the return on investment (ROI) from renting out properties. While capital appreciation often gets the spotlight, rental yield offers a steady stream of income. This makes it a critical metric for gauging long-term success in property investments.

In this blog, we’ll break down what rental yield means, how to calculate it, and the key factors that influence it. We’ll also explore how rental yield varies across major cities in India and what that means for potential investors. 

What is Rental Yield?

Rental yield is a financial metric used to evaluate the income return on a property relative to its market value or purchase price. It is calculated by dividing the annual rental income by the property's total cost or current market value and multiplying by 100 to express it as a percentage.

This percentage represents the return a property investor can expect to earn from rental income alone, without factoring in capital appreciation. In simple terms, it helps investors assess how profitable a property is as a source of rental income. A higher rental yield indicates a better return on investment. This makes it an essential measure for property owners looking to generate consistent cash flow.

How to Calculate Rental Yield?

Rental yield in India, whether for residential or commercial properties, can be calculated using two main formulas. The method you choose depends on whether you're looking at the property's annual rental income or its market value. Here are the two most common ways to calculate rental yield:

1. Gross Rental Yield Formula

This formula calculates the rental income as a percentage of the property's market value. It is a straightforward method that is useful for getting an initial understanding of a property’s profitability.

Gross Rental Yield = (Annual Rental Income / Property Value) x 100

For example, if you earn ₹5,00,000 annually from rent and the property value is ₹50,00,000, then:

5,00,000 / 50,00,000 × 100= 10%

This means the property yields a 10% return on investment based on rent alone.

2. Net Rental Yield Formula

This formula is more accurate as it accounts for additional expenses like property management fees, maintenance, repairs, taxes, and insurance. It gives a clearer picture of the actual ROI after deducting operating costs.

Net Rental Yield = ((Annual Rental Income – Annual Expenses) / Property Value) x 100

For instance, if you earn ₹5,00,000 annually from rent and incur ₹1,00,000 in expenses, with the same property value of ₹50,00,000, then:

5,00,000−1,00,000​ / 50,00,000 × 100= 8%

This means your net rental yield is 8%, which reflects the actual return after deducting expenses.

Now, let's understand some of the major factors that influence rental yield in India. 

Factors Influencing Rental Yield in India

Rental yield in India can be influenced by a variety of factors that affect both the rental income and the value of the property. Here are some of the key factors:

Location of the Property

Where a property is located plays a crucial role in determining its rental potential. Properties in big cities like Mumbai, Delhi, and Bangalore can fetch higher rents based on their proximity to workplaces, schools, and public transport. A property near metro stations, business centres, or good educational institutions will naturally attract more tenants and command better rental rates.

Property Type (Residential vs Commercial)

The type of property—residential or commercial—also impacts rental yield. In many urban areas, commercial properties tend to offer higher rental yields compared to residential properties due to the higher demand from businesses and industries. 

However, residential properties, particularly in key cities, can also provide strong rental income. This is especially true in areas with growing population density.

Property Size and Condition

The physical attributes of a property significantly impact its rental potential. Newer properties with modern amenities and well-maintained infrastructure tend to attract better tenants and command higher rents. The size of the property matters too - compact 1-2 bedroom apartments often have higher occupancy rates in metropolitan areas, while larger units might appeal to specific tenant segments like families or corporate rentals.

Demand and Supply Dynamics

The balance between available properties and potential tenants is a key factor in determining rental yields. In cities where the number of rental properties matches the demand from tenants, rental rates remain stable and attractive. Oversupply can lead to lower rents, while undersupply can drive rental prices up, making it a delicate economic ecosystem.

Economic Factors

The overall economic health of a region directly impacts rental yields. Cities with strong job markets, growing industries, and continuous business expansion tend to have more stable and attractive rental markets. 

A thriving economy leads to higher disposable income and increasing demand for rental properties. On the other hand, areas facing economic slowdown or unemployment may experience reduced rental demand and lower rental yields.

Government Regulations

Policies like rent control laws, property tax regulations, and the introduction of RERA (Real Estate Regulatory Authority) can impact rental yields. For example, rent control laws in certain states might limit the rent a landlord can charge, affecting the potential rental yield. Similarly, tax rates on rental income can also reduce returns for property owners.

Property Management and Operational Costs

Efficient property management is crucial for maintaining good rental yields. High maintenance costs, poor property management, or delays in addressing tenant issues can lead to vacancies or increased expenses, reducing a property's profitability. Proper management ensures that tenants are satisfied. Happy tenants mean a reduced risk of vacancy and consistent rental income.

Inflation and Cost of Living

Inflation directly impacts both the cost of property maintenance and the potential for rent increases. In areas with higher inflation, the cost of goods and services rises, often leading landlords to increase rent. If rent increases in line with inflation, it can help maintain or even improve rental yield over time.

Demographic Shifts

Changing population patterns play a big role in rental markets. The increasing number of young professionals, students, and migrant workers creates a constant demand for rental properties. Cities with universities, IT parks, and growing industries see a continuous influx of people looking for rental accommodations, which helps maintain good rental yields.

By analysing these factors, property owners can identify opportunities for improvement and set practical goals. This allows them to position their properties strategically in the rental market to achieve better yields.

Overview of the Rental Market Landscape in India (2024)

With rapid urbanisation and the rise in job opportunities, there is a growing demand for rental properties, particularly in metropolitan cities. This demand is fueled by young professionals and students migrating to cities like Bengaluru, Mumbai, Delhi-NCR, and Hyderabad for education and employment.

The rental market in India caters to diverse segments, including affordable housing, mid-tier options, and luxury accommodations. Additionally, co-living spaces and serviced apartments are becoming increasingly popular among younger tenants who seek flexibility and cost-effective living arrangements.

Technological advancements have also significantly changed the rental landscape. Platforms like NoBroker and Housing.com have streamlined property searches, tenant management, and rent payments, offering seamless experiences for both landlords and tenants. 

Moreover, the trend toward smart and eco-friendly housing is shaping tenant preferences, highlighting the growing focus on sustainability and modern living.

On the commercial side, office spaces in business districts are seeing renewed demand, particularly from tech companies, start-ups, and e-commerce businesses. This recovery comes after the pandemic significantly impacted office space demand, as remote working and lockdowns led to a decline in leasing activity. 

According to a report by Colliers, the office market in India is bouncing back in 2024, with leasing activity steadily increasing in key cities like Bengaluru, Mumbai, and Delhi NCR. In fact, the average rents across the top six office markets have also surpassed pre-pandemic levels (2019), with core micro-markets seeing up to a 25% increase compared to the pre-pandemic era. 

With this in mind, let’s look at the rental yields in some of the major cities in India.

Residential Rental Yield In India

Here is a comparison of rental yields across major Indian cities:

CityRental Yield (%)Notable Areas with High YieldsBengaluru4.45Sarjapur Road, WhitefieldMumbai4.15Chembur, MulundGurugram4.1DLF City Phases, Sohna RoadPune3.8Kharadi, HinjewadiChennai4.05Adyar, Anna NagarHyderabad3.7Gachibowli, Hitech CityKolkata3.7Rajarhat, New TownDelhi2.8Dwarka, SaketNoida3.75Sector 150

Source: Hindustan Times & Financial Express

• Bengaluru: Leads with the highest rental yield of 4.45%, fueled by a robust IT sector and a rising demand for rental properties in prime areas like Sarjapur Road and Whitefield. The growing trend of companies urging employees to return to physical offices has further boosted rental demand in these hubs.

• Mumbai: The financial capital is close second with a 4.15% yield and significant growth in prominent rental rates in localities such as Chembur and Mulund.

• Gurugram: The city recorded a 4.10% yield, driven by strong demand for commercial spaces across various sectors.

• Pune: Shows a 4.35% yield, with high demand in IT hubs like Kharadi and Hinjewadi.

• Chennai and Hyderabad: These cities offer moderate rental yields of 4.05% and 3.35%, respectively. These cities are experiencing steady demand, particularly in the tech and service sectors, driven by the presence of IT hubs and growing urban populations.

• Delhi: Delhi NCR has one of the lowest rental yields, reflecting subdued demand in its rental market compared to other major cities.

• Kolkata: Kolkata records one of the lower rental yields at 3.7%, influenced by a relatively slow-paced rental market compared to other metros. However, areas with growing infrastructure and accessibility, particularly in the tech and education sectors, are gradually attracting steady rental demand.

These figures provide a snapshot of the rental market across major Indian cities, highlighting areas with higher returns for property investors.

What are the Reasons for Low Rental Yield in India?

Rental yields in India are among the lowest globally, averaging between 2% and 4% in most cities. Several factors contribute to this scenario, making rental income a less attractive option for property investors. Here are the key reasons:

• High Property Prices: The cost of purchasing real estate in India has significantly outpaced the growth of rental income. This imbalance results in a low ratio of annual rental returns compared to the property’s market value.

• Higher Opportunity Cost: Unlike countries with higher rental yields and lower interest rates, India faces a different scenario. Its higher interest rates increase the opportunity cost of investing in rental properties, making other financial instruments like fixed deposits and public provident funds more appealing.

• Tax and Utility Burdens: Renting is treated as a commercial activity, leading to higher property taxes and service taxes for landlords. Additionally, utility rates are often calculated at commercial property levels, further reducing profitability.

• Minimal Policy Support for Rental Housing: The absence of incentives or supportive policies for rental housing has hindered the creation of a strong rental housing stock in the country.

• High Home Loan Rates: Home loan interest rates in India, typically between 7-8%, are significantly higher than in developed countries. This reduces the affordability of property investments aimed at rental income.

• Limited Job Mobility: Although job mobility is increasing, it remains lower than in countries with higher rental yields. A stable, long-term population base reduces demand for rental housing.

• Landlord Reluctance and Property Maintenance Issues: Many landlords hesitate to invest in proper maintenance or upgrades for their rental properties, impacting their appeal and rental returns.

• Inflationary Pressure: High inflation rates eat into the real returns on rental income, further lowering the attractiveness of rental investments.

• Tenant-Landlord Relationship Challenges: Legacy disputes in landlord-tenant relationships are a significant challenge in India. Historical legal disputes and difficulties in evicting tenants discourage landlords from charging competitive rents, which limits overall market growth.

How to Increase the Rental Yield in India?

Here are some effective strategies landlords can use to boost rental yields and maximise property returns:

• Regular Property Maintenance: Well-maintained properties attract better tenants and higher rents. Regular upgrades, repairs, and modern amenities can significantly improve rental value.

• Furnishing and Modernising: Offering furnished homes or incorporating modern features like smart appliances, modular kitchens, and efficient lighting makes the property more appealing. This allows landlords to charge higher rents.

• Location Advantage: Investing in properties located near business hubs, educational institutions, or well-connected transport networks can help achieve better rental yields due to higher demand.

• Targeting Short-Term Rentals: Exploring short-term rental options like serviced apartments or vacation rentals through platforms such as Airbnb can yield better returns compared to long-term leases.

• Co-Living and Shared Spaces: Catering to the needs of millennials and working professionals with co-living spaces can increase occupancy rates and rental returns. This trend is growing in cities with high job mobility.

• Flexible Leasing Options: Offering flexible lease terms, such as month-to-month rentals or shorter contracts, can attract tenants willing to pay a premium for convenience.

• Optimising Property Taxes and Utilities: Ensuring compliance with local tax rules and choosing cost-efficient utility solutions can help landlords maximise their rental income.

• Market-Based Rent Adjustments: Regularly evaluating market trends and adjusting rent prices to match demand can prevent properties from being undervalued.

• Using Property Management Solutions: Investing in comprehensive property management software, like Crib, can streamline tenant sourcing, maintenance tracking, and rent collection. This helps maximise rental income and improves overall efficiency.

Overall, rental yield serves as a vital indicator for assessing the returns on property investments. Prospective investors should carefully analyse rental yield using tools like a rental yield calculator or consult a real estate expert to make informed decisions and avoid potential pitfalls.

An Analysis of Rental Yields in Metros and Tier-2 Cities

Rental yields vary significantly between India's metropolitan (Tier-1) cities and Tier-2 cities. Let's take a look at what the rental yield scene is across different tiers:

1. Differences in Rental Yield

• Metropolitan Cities (Tier-1): Major metros like Delhi, Mumbai, and Bengaluru typically offer rental yields ranging from 2% to 3%. High property prices in these cities often outpace rental income growth, leading to comparatively lower yields.

• Tier-2 Cities: Cities such as Goa, Indore, and Lucknow have demonstrated higher rental yields, sometimes reaching up to 8%. Lower property acquisition costs combined with competitive rental rates contribute to these enhanced returns.

2. Regional Economic Influences

• Economic Diversification: Tier-2 cities are experiencing economic growth due to factors like reverse migration and increased consumer demand. This diversification attracts residents and businesses, boosting the real estate market.
  Affordability: The relatively lower cost of living and property prices in Tier-2 cities make them attractive to both investors and tenants, fostering robust rental markets.

3. Impact of Infrastructure Development

Investments in infrastructure, such as improved connectivity and urban development projects, have significantly increased property values and rental demand in both metros and Tier-2 cities. For instance, the expansion of IT parks in areas like Hinjewadi has led to a surge in residential developments and higher property values.

In summary, while metropolitan cities offer the advantage of established markets, Tier-2 cities are emerging as attractive investment destinations due to higher rental yields, economic growth, and ongoing infrastructure developments.

Factors Leading to Variation in Rental Yields Across Cities

As we have seen, different cities exhibit varying rental yields, but what drives these differences? Let’s look at some key reasons:

1. Economic Growth and Employment Opportunities

Cities with strong economic growth and ample job opportunities, especially in sectors like IT, manufacturing, and services, see higher demand for rental housing. This demand drives up rental yields. For example, cities like Bengaluru and Pune benefit from thriving IT hubs, while others with limited job growth lag behind.

2. Regulations and Property Laws

Rental laws and tenant-friendly regulations often influence yields. In cities where landlords face challenges like eviction delays or outdated laws, rental markets remain subdued. Favourable policies, on the other hand, encourage better returns.

3. Lifestyle Preferences and Urbanisation

Rapid urbanisation and changing lifestyle choices impact rental demand. Cities attracting young professionals and migrants witness stronger rental markets. For instance, co-living spaces and rented accommodations are increasingly popular in urban centres like Gurugram and Hyderabad.

4. Public Infrastructure and Connectivity

Well-developed infrastructure, such as metro networks, highways, airports, and IT corridors, significantly boosts rental demand. Areas with excellent connectivity and proximity to workplaces, like Whitefield in Bengaluru or Gachibowli in Hyderabad, tend to command higher rents.

Investors should assess these aspects before making property investment decisions to maximise returns.

Conclusion

Rental yield is a critical metric for evaluating the profitability of property investments, offering insights into the steady income potential of a real estate asset. While India’s average rental yield remains modest at around 3%, cities like Bengaluru, with its robust IT-driven demand, stand out with higher yields. However, factors such as high property prices, tenant-friendly regulations, and economic dynamics influence the overall rental market.

For investors, understanding rental yield is essential for making informed decisions. By evaluating factors like location, property type, and infrastructure, they can identify opportunities to maximise returns. Additionally, adopting strategies such as proper property management, using short-term rental options, and staying updated on market trends can further enhance rental income.

Frequently Asked Questions

Q. What is the rental yield in India?

A. The average rental yield in India stands at around 3%. However, it varies across cities, with Bengaluru leading at 4.45% and cities like Delhi and Kolkata offering yields as low as 2.8% and 3.15%, respectively.

Q. What is a low rental yield?

A. A rental yield below 3% is generally considered low. It indicates that the rental income is not proportionate to the property's market value, potentially making the investment less attractive.

Q. What rental yield is good in India?
A. A rental yield of 6-8% is considered good in India. Typically, achieving such yields requires investing in areas with high demand, good connectivity, and favourable market conditions.

Q. Which city in India has the highest rental yield?

A. Bengaluru has the highest rental yield in India, at 4.45%. The city's strong IT sector and increasing demand for rental properties contribute to its leading position in the market. In fact, specific areas like Sarjapur Road and Whitefield have seen average rental values rise by as much as 8%.