What is property yield and how is it calculated?

Overview

When deciding whether or not to purchase a particular property, most investors work out the "yield" to help make their decision. People buy property for all sorts of reasons, but the majority of investors are interested in two things above all: a property's current return and its potential yield. Get those numbers right and you can compare one investment against another with confidence — get them wrong and you risk paying too much for too little income.

Property investment terms explained

Investing in property can be difficult. Without a clear understanding of the general terms involved with purchasing, it can actually become impossible to invest effectively. So the first thing to do is get a clear understanding of yield and return, because these two terms are used constantly in property investment circles — and they don't mean the same thing.

1. Yield

Yield is a measure of future income from an investment. It is typically calculated on an annual basis as a percentage of the asset's cost or market value. Importantly, it does not have anything to do with capital gain — yield is about the rent, not the rise in the property's price.

2. Gross yield

Gross yield is the income from an investment before expenses are deducted. For property, the running costs can add up quickly, so there is often a big difference between gross yield and net yield. A headline gross figure always looks more attractive than the reality.

3. Net yield

Net yield is the income from an investment after expenses have been deducted — the left-over amount. Those costs and expenses will likely include purchase and transaction costs such as legal fees and loan establishment fees, as well as rent lost while the property sits vacant. There could also be repairs and maintenance costs, management fees, insurance, association dues, taxes and other charges. You often won't know the true amount of these costs in advance, so you'll have to estimate them carefully.

4. Return (or total return)

Return is the gain (or loss) made on an investment over a particular period of time. It can be expressed in monetary value or as a percentage derived from the ratio of profit to investment, and it includes capital gains. Unlike property yield, the return is focused on the property's past performance rather than its future earning potential.

The difference between yield and return

Simply put, yield is based on rental income only, whereas return includes capital gains. Both terms are used throughout the property evaluation process, so it's important to know the time period associated with the numbers a broker or agent supplies. For example, find out whether the figures quoted have been calculated on an annual basis — that way you can judge whether one property is a genuinely better investment than another. And always remember: one number is looking at the past (return), while the other looks to the future (yield).

How to calculate yield

There are three steps to calculating a property's net yield:

• First, deduct the property's ongoing costs from the yearly rental income.
• Second, divide the result of the first step by the property's value.
• Third, multiply that result by 100 to give you a percentage.

This gives you the property's net yield as an annual percentage. The formula for the simpler gross figure is:

Gross yield = (annual rental income ÷ property value) × 100

For example, a condo that earns ₱240,000 in rent a year on a ₱4,000,000 purchase price has a gross yield of 6%. Subtract the annual running costs — say ₱60,000 in association dues, maintenance and management — and the net yield drops to around 4.5%. That gap is exactly why net yield is the number serious investors rely on.

Where financing comes in

Yield tells you what a property is likely to earn; your loan tells you what it costs to hold. Once you've worked out the net yield, compare it against your home loan repayments to see whether the rent comfortably covers the financing. This is where a broker helps. Nook is the Philippines' original and award-winning mortgage broker — get pre-qualified in about 3 minutes, then a dedicated consultant compares 20+ banks and runs your entire application for you, at no cost. You can also check your numbers first with Nook's loan calculators before you commit to a property.