Finds the yield on a property let out to tenants. Dividing the rent by the price alone gives the gross yield; bringing in the running costs and the purchase costs gives the net yield. Enter every amount in the same currency unit.
The yield on a property let to tenants says how much it produces against what was put into it. There are two ways of stating it.
Here is the monthly rent and the purchase price. This divides the rent by the price and looks no further, and it is almost always the figure quoted in an advertisement.
Here is the annual running cost and the cost of buying. Management fees, a sinking fund for repairs, property tax and insurance make up the first; agency fees, registration and purchase tax make up the second.
The gross yield ignores every outgoing. The net yield divides what is actually kept by what was actually spent. Both the top and the bottom of the fraction move, so the gap between the two figures is wider than most people expect.
A property at 20,000,000 with a monthly rent of 90,000, annual costs of 250,000 and purchase costs of 1,400,000 yields 5.4 per cent gross and 3.88 per cent net.
The annual rent is 90,000 × 12 = 1,080,000, and dividing by 20,000,000 gives the gross figure of 5.4 per cent. Taking off the costs leaves 830,000, and dividing that by 21,400,000 gives 3.88 per cent. Recovering the outlay from rent alone takes 25.8 years.
No rent arrives while the property stands empty. One vacant month a year cuts the real yield to eleven twelfths of the figure here.
Spread repairs, including the large ones that eventually fall due, across the annual running cost. Left out, they make the yield look better than it is.
Interest on a mortgage is not counted here. To judge the return on the cash actually committed, that has to be worked out separately.