What is yield?

Yield is one of the most central concepts in property investment. In the property industry, the term yield is used for the ratio between income and property value (rental income divided by property value). Put simply, yield is a snapshot of rental income divided by the market value of a property.

The concept of yield can be broken down into:

Initial yield (initial direct return): The direct return at the time the property is purchased. Internationally, “cap rate” is also used here.

*Gross yield: *Gross rental income/market value

*Net yield: *Gross rental income - direct property costs/market value

Gross and net yield can both be based on either contract rent or market rent. Contracted gross rental income is the most common, but in markets where there is a large difference between market rent and contract rent, market rent is often the most relevant.

When it comes to net yield, it is not always clear-cut what is included in “direct property costs”. It is common to include ordinary operating and maintenance costs - owner costs. It is less common to include indirect costs (overheads) as long as they do not follow the property on a sale.

The most widely used and concrete yield concept is net yield based on contracted rents. Net yield defines the cash flows the property currently generates to cover interest costs and other costs. In reality, this is the direct return on the property.

The formula for net yield

The formula for calculating net yield is to take the property's rental income minus operating costs, divided by the property value * 100.

Example calculation:

When calculating yield, there are some important assumptions to bear in mind:

• Tax is not taken into account
• Earnings (rental income) are perpetual and do not change
• It is assumed that the property is purchased with equity only
• The risk basis of the property is static