What is Property Yield and How is it Calculated?
In the process of deciding whether or not to purchase a particular property, most property investors will work out the ‘yield’ to help make their decision. Although some people buy properties for different reasons, most investors are interested with a property’s current return and potential yield.
Property Investment Terms Explained
Investing in property can be difficult. Without a clear understanding of the general terms involved with purchasing, it can actually become impossible to invest effectively. So the first thing to do is get a clear understanding of yield and return because these two terms are often used in property investment circles.
Yield is a measure of future income from an investment. It is typically calculated on an annual basis as a percentage of the asset’s cost or market value. It does not have anything to do with capital gain.
2. Gross Yield
Gross yield is the income from an investment prior to expenses being deducted. For properties, common expenses can be a lot, so there is often a big difference between gross yield and net yield.
3. Net Yield
Net yield is the income from an investment after expenses have been deducted (the left over amount). The costs and expenses will likely include purchase and transaction costs such as legal fees, loan establishment fees, and rent lost from the property being vacant. There could also be repairs and maintenance costs, management fees, insurance, rates and other charges. You often won’t know the true amount of the costs and will have to estimate them.
4. Return or Total Return
Return is the gain (or loss) made on an investment over a particular period of time. It can be either expressed in monetary value or as a percentage derived from the ratio of profit to investment and includes capital gains. Unlike the property yield, the return is focused on the property’s past performance, rather than its future earning potential.
Difference Between Yield and Return
Simply, yield is based on rental income only whereas return includes capital gains. Both terms are often used in the property evaluation process. But it is important to know the time period associated with the numbers that brokers / agents supply. For example, find out if the numbers quoted have been calculated on an annual basis. That way you can know whether one property is a good investment verses another. Also remember that one number is looking at the past (return) and the other looks to the future (yield).
How to Calculate Yield
There are three steps to calculating a property’s net yield.
In the first step you need to deduct the property’s ongoing costs from the yearly rental income. Secondly, you divide the result of the first step by the property’s value. Then third and finally, multiply the result of the second step by 100 to give you a percentage. This will give you the property’s yield as an annual percentage.
Gross yield = annual rental income / property value x 100
Net yield = annual rental income – annual expenses and costs / property value x 100