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Rental Yield
Rental Yield is the rental income (Rent) received during a financial period (12 months) less all expenses inherent in owning the property. It is expressed as a percentage and can provide an indication of the rate of return (ROI) on an investment, before tax. This can be calculated either on a gross basis (excluding expenses) or a net basis (including expenses). It can also be calculated on purchase price or on current value. Each of these different measurements can be used to give different information about the property.
Calculating Gross Yield
The gross yield is calculated by dividing the income over a 12 month period by the value (either purchase price or current value) of the property.
E.g. if someone purchased a property for $200,000 and it rented for $400 per week, the gross yield would be:
$20,800/$200,000 or 10.4%
Why Calculate Gross Yield
The main reason to calculate gross yield is to allow an apple-for-apples comparison between two properties in terms of Return on Investment (ROI). It does this by showing the return (rental income divided by the cost of investment (value) in a way that allows a straightforward comparison. A common rule of thumb is that cashflow positive properties tend to have roughly a 10% gross yield.
Calculating Net Yield
The net yield is calculated by dividing the income minus all the property related expenses (i.e. Rates, Interest payments, Principal payments, Repairs and Maintenance, Property Manager fees, Insurance) over a 12 month period by the value (either purchase price or current value) of the property.
To continue the above example suppose the property's expenses total $18,800. Then the net yield would be:
$2,000/$200,000 or 1%
Why Calculate Net Yield
The main reason to calculate net yield is to allow a more accurate comparison between two properties in terms of return on investment.
It is argued by some that a net yield comparison is better because the gross yield, while easier to calculate can be misleading. This is particularly the case when one or more properties have unusually high expenses. This can be specifically a problem for calculating yields on properties in small towns, which tend to have lower prices and comparatively high rents resulting in higher gross yields. However since the expenses involved in owning a property tend to be roughly the same no matter where in the country that property is, their expenses tend to be comparatively high, leading to a low net yield.
Yield on Purchase Price or Current Value
In each calculation of yield the value of the property can be taken as either the purchase price, or the current value. Each of these different figures provides different information. Using yield on purchase price allows the comparing of two or more potential purchases to assess which has the better return. Yield on current value in contrast allows the assessment of how an investment is presently performing and in particular whether it would be better to switch the resources invested into that property into another investment.
For example assuming all else is equal if an investor has a property whose net yield on purchase price is 5% but on current value is 1% and they could sell that property and buy another property for the same price with a current net yield of 5% then it would seem likely that they should sell the first property and purchase the second property.
