Yield
Definition:
Yield refers to the income return on an investment, usually expressed as a percentage of the investment’s cost or market value. In real estate, yield typically measures the annual income (such as rent) generated by a property relative to its purchase price or market value. A higher yield indicates that the property is generating more income relative to its cost, making it potentially more profitable.
🔍 Did You Know?
Yield can be calculated as a “gross yield,” which doesn’t account for expenses, or a “net yield,” which factors in operating costs and other expenses.
Examples:
Example 1:
A property was purchased for $400,000 and generates $40,000 in annual rental income. The gross yield is:
[ $40,000 ÷ $400,000 = 10% ]
Example 2:
An investor buys a commercial property for $1,000,000, and after deducting $100,000 in operating expenses, the net income is $80,000. The net yield is:
[ $80,000 ÷ $1,000,000 = 8% ]
Why It’s Important:
Yield helps investors assess the income-generating potential of a property and compare it to other investment opportunities. A higher yield is desirable, but it’s important to consider the risk and location factors that might impact a property’s ability to consistently generate income.
Who Should Care:
- Real estate investors looking to compare the income returns of different properties.
- Lenders evaluating the income potential of a property relative to its loan amount.
- Property managers assessing how effectively a property is generating rental income.
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