Yield is the heartbeat of any rental investment. But confusing Gross Yield with Net Yield is a rookie mistake that can cost you thousands. Here’s how to calculate the true profitability of your property.
What is Real Estate Yield?
In simple terms, yield is the annual return you earn on your investment, expressed as a percentage. It tells you how hard your money is working for you. However, not all yield calculations are created equal.
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Try the Yield CalculatorGross Yield: The "Big Picture" Number
Gross Yield is the simplest calculation. It measures the return on investment before expenses. It’s useful for quickly filtering potential deals, but it doesn't tell the whole story.
Formula
Gross Yield = (Annual Rental Income / Property Value) × 100
- Property Value: $500,000
- Monthly Rent: $2,500 ($30,000/year)
- Calculation: ($30,000 / $500,000) × 100 = 6.0%
Net Yield: The "True Profit" Number
Net Yield is the gold standard. It takes into account all the operating expenses (taxes, insurance, maintenance, management fees) to show you what actually ends up in your pocket.
Formula
Net Yield = [(Annual Rental Income – Annual Expenses) / Total Property Cost] × 100
- Annual Expenses: $8,000 (Taxes, Insurance, Repairs)
- Net Income: $30,000 - $8,000 = $22,000
- Calculation: ($22,000 / $500,000) × 100 = 4.4%
Why the Difference Matters
In the example above, a 6% Gross Yield looks great on paper. But the 4.4% Net Yield is the reality. If you bought the property expecting a 6% return, you’d be disappointed.
Always use Net Yield for final due diligence. It accounts for the "silent killers" of cash flow like vacancy rates and maintenance costs.
Key Takeaways
- Gross Yield is for quick screening of multiple properties.
- Net Yield is for detailed analysis of a specific deal.
- High Gross Yield + High Expenses = Low Net Yield (Bad Deal).
- Always factor in a vacancy buffer (typically 5-8%).
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