Oftentimes, the reason why people go into real estate is to acquire a stable investment that will provide returns in the future, and they are not wrong. But what are the different real estate investment return terms? What is the difference between yield and return? How do we compute yield in real estate? Charlotte Cossar from realestate.com.au differentiates real estate yield, gross rental yield, real estate net yield, and return or total return yield.
1. Real estate yield
"A real estate yield is a measurement of future income on an investment. It is generally calculated annually as a percentage, based on the asset’s cost or market value. It has nothing to do with capital gain."
2. Gross rental yield
"A gross rental yield is the income on an investment prior to expenses being deducted. For property, these expenses can be quite substantial, so there can be a huge difference between gross and net yield."
3. Real estate net yield
"A real estate net yield is the income on an investment after expenses have been deducted. The costs and expenses will likely include purchasing and transactions costs, such as stamp duty, legal fees, pest and building inspections, loan start-up fees, advertising, and rent lost through vacancy."
"There might also be repairs and maintenance costs, management fees, insurance, rates and charges. Most of the time, you won’t know the exact amount of these costs and will have to estimate them."
4. Return or total return yield
"A return is the gain or loss made on an investment, over a specified period. It includes capital gains and is either expressed nominally, in dollars, or as a percentage derived from the ratio of profit to investment."
"Unlike the property yield, the return is focused on the property’s past performance, rather than its future earning potential."
Cossar also differentiates yield from return:
"As explained in the definitions above, a yield is only based on rental income, whereas a return includes capital gains."
"Both are generally used in the sales patter, but be sure to clarify the time periods associated with the statistics the agents provide – i.e. find out whether they are calculated on an annual basis – before determining whether the property’s a good investment."
"Remember, too, that one is retrospective (return) and the other looks at the future (yield)."
How do we compute real estate yield? Cossar provides a step-by-step guide:
To calculate yield, you need to follow a few steps to get the property’s yield as an annual percentage.
Step 1: Deduct the property’s ongoing costs and costs of vacancy (i.e lost rent) from the property’s annual rental income (weekly rental x 51).
Step 2: Divide the result of the first step by the property’s value.
Step 3: And then, finally, you multiply the result of the second step by 100.
To calculate the gross yield: Annual rental income (weekly rental x 52) / property value x 100
To calculate the net yield: Annual rental income (weekly rental x 52) – annual expenses and costs/ property value x 100
Final thoughts
Before investing in real estate, it is important to know what your purpose is in acquiring a house or a condo unit. Are you planning to rent it out? Or use it for yourself? And if you are planning to have it rented, make sure that the rental fee is enough to cover all expenses incurred in acquiring the unit to optimize the yield. After all, it is your hard-earned money, so make sure to get the best bang for your buck!
Source:
Cossar, C. (2020, September 18). What is yield and how do you calculate it? Realestate.Com.Au. https://www.realestate.com.au/advice/what-is-yield/