Yield
Yield measures income return on an investment property. Learn how to calculate gross and net yields for real estate investments.
Definition
Yield refers to the income return on an investment, expressed as a percentage of its cost. In real estate, yield can be calculated as gross rental yield (annual rental income divided by the property’s purchase price) or net yield, which subtracts operating expenses (maintenance, insurance, taxes) from rental income before dividing by purchase price. Yield helps investors compare potential returns across properties and other asset classes. Higher yields indicate greater cash flow relative to investment, but may accompany higher risk or lower property appreciation.
Why It Matters
Yield is how you compare a fourplex against an index fund without fooling yourself. Gross yield, annual rent over purchase price, flatters every property. Net yield, after taxes, insurance, management, maintenance and vacancy, usually lands two to four points lower and is the number your bank balance will actually match. Buy on the gross figure and you learn the difference the first year a roof and an insurance renewal arrive together.
Examples
A $450,000 triplex renting for $3,900 a month looks like a 10.4 percent gross yield, but $6,200 in taxes, $2,400 insurance, $4,680 management and $5,000 maintenance bring the net to about 6.3 percent.
An investor weighs a 4.9 percent net yield in an appreciating Seattle neighborhood against 7.8 percent in Spokane and chooses based on whether the goal is monthly cash flow or long term growth.
A condo shows a healthy yield right up until the HOA passes a $19,000 special assessment for siding, wiping out two years of net income.
Tips
Budget maintenance as a percentage of rent, roughly 5 to 10 percent depending on the building's age, rather than as whatever happened to break last year.
Recalculate yield against current market value instead of your original purchase price; a property that has doubled may now yield 3 percent and be worth selling or exchanging.
Demand trailing twelve month operating statements and actual tax bills instead of a pro forma, since pro formas assume full occupancy and a maintenance budget nobody has ever hit.
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