Yield is a measure of the income-generating potential of an investment property. It is typically expressed as a percentage and is calculated by dividing the annual rental income by the property’s purchase price or current market value. Here’s a more detailed breakdown:
- Gross Yield: This is the simplest form of yield calculation. It does not take into account any expenses related to the property. To calculate gross yield, you take the total annual rental income and divide it by the property’s purchase price or current market value.
- Formula: Gross Yield = (Annual Rental Income / Property Value) * 100
- Net Yield: Unlike gross yield, net yield factors in the operational costs of owning the property, such as maintenance, management fees, insurance, and property taxes. This gives a more accurate picture of the investment’s profitability.
- Formula: Net Yield = ((Annual Rental Income – Annual Expenses) / Property Value) * 100
- Capitalization Rate (Cap Rate): This is often used interchangeably with net yield in the United States and is a key metric to evaluate the return on an investment property. Cap rate can be particularly useful when comparing different investment opportunities in the real estate market.
- Formula: Cap Rate = (Net Operating Income / Property Value) * 100
Yield is an important metric because it helps investors assess the potential return on investment, compare different properties, and make informed decisions about purchasing, selling, or holding real estate assets. It’s also a quick way to gauge whether the rental income is appropriate relative to the value of the property.