💰 Calculating rental income from property purchases: Rental yield vs. bank interest

Let me personally help you do the math and see if renting is really that worthwhile!

Hong Kong people love to say "buy bricks" because they believe buying a property and collecting rent is a more stable option than investing in the stock market. Many people say, "Since I have mortgage payments anyway, I might as well buy and collect rent, and the rent will help with the mortgage!" It sounds like a no-brainer, but is the reality really that simple?

In reality, buying a property for rental income requires careful consideration of the rental yield and bank interest costs , as well as the associated costs and risks. This article uses practical examples to help you calculate each factor, allowing you to understand whether renting a property is a surefire way to make a profit or whether there's a chance of a loss.

1️⃣ What is the rental yield? 📊

definition

• Rental return rate = annual rent ÷ property price × 100%
• This figure reflects the rate of return you can get from buying a property for investment and collecting rental income.

Hong Kong average

• According to market data, the average rental return rate for residential properties in Hong Kong is approximately 2% to 3% .
• For some small units or popular locations, the rate can be as high as 4% or more; but for large units, it is usually less than 2%.

👉 Editor's note: You can't just look at the rate of return, as there are also bank interest costs and miscellaneous fees to consider.

2️⃣ Bank interest costs🏦

Basic Concepts

• When you borrow money from a bank for a mortgage, you have to pay interest.
• Interest cost = loan amount × interest rate.

Hong Kong situation

• Based on the data in 2024, H is generally around 3% to 4%.
• If you borrow 90% of the mortgage, the interest expense will be quite high.

👉 Editor's tip: The level of interest directly affects your rental income and whether you make a profit or a loss.

3️⃣ Calculation Example 1: Rent of a mid-priced unit🏢

Assumptions

• Property price: 6 million
• Mortgage: 80% (4.8 million), 30-year term, 3% interest rate
• Monthly payment: approximately 20,200 yuan (principal + interest)
• Monthly rent: 18,000 yuan

Annual figures

• Annual rental income: 216,000 yuan
• Annual contribution: 242,400 yuan
• Rental yield: 216,000 ÷ 6,000,000 = 3.6%
• Interest on loan: around RMB 140,000

👉 Results:
On the surface, the rental return rate is 3.6%, but due to the high interest expenses, the actual rent may not fully cover the mortgage payments, and some cash flow will be lost.

My opinion: Many novices think that "rent helps with mortgage payments", but when you calculate the numbers, it turns out they still have to pay for it themselves.

4️⃣ Calculation Example 2: High Returns from Small Units💡

Assumptions

• Property price: 3 million
• Mortgage: 90% (2.7 million), 30-year term, 3% interest rate
• Monthly payment: approximately 11,400 yuan
• Monthly rent: 11,000 yuan

Annual figures

• Annual rental income: 132,000 yuan
• Annual contribution: 136,800 yuan
• Rental yield: 132,000 ÷ 3,000,000 = 4.4%
• Interest expense of approximately 80,000

👉 Results:
Although small units have high returns, the rental income is almost the same as the mortgage payments, and cash flow is still tight.

Editor’s Tip: Small units with high returns may sound attractive, but in reality, the rent may not be enough to cover the interest. Furthermore, you’ll have to factor in management fees, rates, and maintenance costs, which could result in a loss.

5️⃣ Hidden costs and risks ⚠️

Management Fees

• Generally, the price is between $3 and $6 per square foot. Although small units have low prices, the management fees are high, which will lower the return.

Rates and Government Rent

• This is approximately 5% of the property's valuation.

Maintenance costs

• Major renovations to old buildings or housing estates can cost tens to hundreds of thousands of dollars.

Vacancy risk

• There is no guarantee that the property will be rented every day, and you will have to pay the mortgage yourself during the vacancy period.

👉 Editor's note: Many investors ignore miscellaneous expenses and risks, and ultimately find that collecting rent may not actually be profitable.

6️⃣ Investment Tips: How to Count? 🧮

Step 1: Calculate rental return rate

• Calculate the rent divided by the property price to see if it is higher than the market average.

Step 2: Calculate interest costs

• Use a mortgage calculator to estimate future payments and interest.

Step 3: Calculate cash flow

• Rental income - mortgage payments - management fees - miscellaneous expenses, it depends on whether it is positive or negative.

Step 4: Reserve buffer

• Expect vacancy periods, interest rate hikes, and maintenance fees.

👉 Editor's advice: If cash flow is negative for a long time, investment pressure will be very high, so don't enter the market blindly.

7️⃣ Real Cases 👤

Ajun, 35, bought a small flat in Tsuen Wan for HK$3.5 million and took out a 90% mortgage. Initially, he thought the HK$12,000 monthly rent would cover the mortgage payments, but the payments actually reached HK$13,500. Adding management fees and rates, he had to pay out of pocket every month. Interest rate hikes pushed the payments to HK$15,000, putting Ajun's cash flow under severe pressure and ultimately leading to a loss.

👉 This example reminds everyone: collecting rent does not guarantee profit ; you must take interest and miscellaneous expenses into account.

8️⃣ Editor’s Summary✨

When buying a property and collecting rent, you need to calculate the following:

• It makes sense for the rental return rate to be higher than the bank interest rate
• Consider contributions, interest, management fees, rates, renovation and maintenance
• The cash flow must be stable. You cannot rely on yourself for a long time.
• Invest for the long term, don't expect big profits in the short term

🙋♀️ Editor's message:
While the prospect of collecting rental income is appealing, it's not for everyone. The most important thing is to understand whether you can afford the risk and calculate your expectations before entering the market. Buying a property and collecting rental income isn't a guaranteed win, but rather a strategy and preparation that ensures a secure future.