Rental Yield is Among the Lowest Forms of Passive Income Despite its Popularity - Report

According to the recently published 2023/2024 Real Estate Survey by the Kenya National Bureau of Statistics (KNBS), rental income, while widely pursued as a passive income avenue, offers some of the lowest returns for investors in the real estate sector.

The survey evaluated the rental yields of various residential property types, providing critical insights for individuals considering real estate investments.

Rental yield is a key metric used to determine the return on investment (ROI) in real estate. It is calculated as the annual rental income expressed as a percentage of the property’s purchase price.

For instance, a 3% rental yield means that for every Ksh1 million spent on purchasing a property, an investor earns Ksh30,000 annually before accounting for taxes, maintenance, or other expenses.

While this metric highlights the income generated, it does not factor in potential property appreciation, which could enhance overall returns over time.

Read Also: 14 Counties Where Women Have Overtaken Men in Employment

A Closer Look at Rental Yields In Kenya by Property Type

The KNBS report reveals significant disparities in rental yields based on property types and locations. 

For instance, bedsitter apartments, with an average sale price of Ksh4.57 million and monthly rent of Ksh8,500, yield 2.2% annually—the lowest among the property types studied. Similarly, one-bedroom flats priced at Ksh6.42 million, earning Ksh15,000 in monthly rent, yield 2.8%.

On the higher end, two-bedroom townhouses, with a sale price of Ksh17.35 million and monthly rent of Ksh120,000, offer an impressive annual yield of 8.3%. Three-bedroom maisonettes, priced at Ksh20.88 million and generating Ksh140,000 monthly, yield 8.0%. These properties generally attract higher-income tenants, resulting in better returns.

Flats and apartments, which dominate Kenya’s urban rental market, also displayed varied performance. For instance, two-bedroom flats priced at Ksh7.87 million and earning Ksh28,000 monthly have a rental yield of 4.3%, while three-bedroom flats priced at Ksh13.49 million and generating Ksh75,000 monthly yield 6.7%.

However, larger apartments with four or more bedrooms, priced at Ksh46.4 million and earning Ksh170,000 monthly, have reduced yields of 4.4%, mainly due to their high purchase prices.

Read Also: Land in Ruaka is More Expensive Than Karen, Runda & Kitisuru - New Report

The Role of Location in Rental Yield

The geographic location of properties significantly impacts rental yield.

Properties in Nairobi  Middle regions, such as Kasarani and Ruai, command higher rental prices but often yield lower percentages due to their steep purchase prices. For instance, the average sale price of a two-bedroom flat was Ksh13.4 million in Nairobi middle, Ksh12.4 million in Mombasa, Ksh6 million in Machakos.

The impact of location on rental yields is evident when comparing different regions. 

The rental yield for a two-bedroom flat in Mombasa stands at 1.45%, reflecting its relatively high sale price and modest rent of Ksh15,000 per month. 

In Nairobi Middle, the same type of property yields 1.34%, slightly lower due to a marginally higher sale price. 

Meanwhile, Machakos offers a slightly better rental yield at 1.6%, as the lower purchase price of Ksh6 million offsets its lower rental income of Ksh8,000 per month. 

This trend demonstrates that while prime locations may command higher rent, their elevated purchase costs often suppress overall rental yields.

Read Also: Is Ksh100k Enough to Start a Side Hustle?

High Occupancy Rates and Strong Demand

The survey found that high occupancy rates were instrumental in maintaining rental income stability. Remarkably, certain property types, including one-bedroom bungalows, two-bedroom maisonettes, and three-bedroom townhouses, achieved full occupancy during the survey period. 

This high demand underscores the importance of targeting property types and locations with strong tenant uptake. The survey shows that in 2023, the residential market featured a variety of property types, with three-bedroom flats being the most common (23.3%). Nairobi City County dominated the market, accounting for 66.7% of all available properties.

Additionally, the report also shows that the rental market’s reliance on occupancy rates—which stood at 88.8% across all residential property types in 2023—is critical in sustaining returns.

Read Also: I Got a Job Offer Paying Ksh20k More in Net, But No Benefits, Should I Take It?

The Bigger Picture: Combining Rental Income with Appreciation

While the data highlights the relatively low income generated from rental yields, it is essential to consider potential capital gains from property appreciation. Unrealised gains can increase your net worth on paper and be used to access financing.

When calculating rental yield, investors should consider factors not covered in the survey, such as maintenance costs and rental income tax, which can further impact rental profitability. 

For example, maintaining older properties or those with extensive amenities can be costly, reducing net returns. Tax obligations, including income tax on rental earnings, also lower the effective yield. Investors must carefully account for these hidden expenses when evaluating real estate investments.

Off-take Time for Sale of Residential Properties

The speed at which residential properties sell varies significantly based on property type and location. According to the KNBS report, three-bedroom apartments were among the most commonly sold residential properties, accounting for 23.3% of total transactions.  

Properties such as two-bedroom town houses, and three-bedroom bungalows took the least time at 6 months and 8 months, respectively. On the other hand, three- and two-bedroom apartments took the longest time at 19 months and 18 months, respectively.

The survey also revealed that generally, a longer off-take time tends to reduce the actual sale price of the property. For example, properties whose off-take time was twelve months or more fetched lower sale prices compared to the advertised prices except for one- and two-bedroom apartments

Nonetheless, the survey showed that the residential property market showed strong demand throughout the year, with 76.2% of properties that were in the market having successfully sold. 

For investors, understanding off-take times is crucial when planning real estate investments. Faster-selling properties ensure higher liquidity, allowing investors to convert their assets into cash more quickly if needed. Conversely, properties with extended off-take times may require more strategic pricing and marketing efforts to attract buyers.