Net yield & gross yield – what’s the difference?
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Yield is one of the key factors in deciding whether or not to invest in a commercial property. And it is also one of the most confusing for people to understand.
Knowing what type of yield is being talked about, and how it was calculated, will make you a much more informed investor. Unless you know the difference, you won’t be comparing apples with apples.
Basically when it comes to yield there are two types: gross yield and net yield.
Gross yield is everything before expenses. It is calculated as a percentage based on the property’s cost or market value divided by the income generated by the property.
Net yield is everything after expenses. It takes into account all the fees and expenses associated with owning a property. As such, it is a far more accurate way of calculating actual yield. It is also much harder to calculate as most costs are variable.
However factoring in everything you can, and making educated guesses about the things you can’t, will give you a much clearer sense of what the likely yield will be.
What should be included in net yield?
The costs associated with owning a commercial property include annual and one off fees such as taxes, ongoing costs such as insurance and rates, and variable costs such as maintenance and vacancy costs.
Net yield should include fees and expenses such as stamp duty, land tax, strata levies and any legal costs.
Ongoing costs include water rates, council taxes, property management fees and insurance costs. However, a lot of commercial leases pass these costs on to the tenant. You can exclude any costs that are likely to be borne by the tenant.
Variable costs include maintenance and repairs as well as the cost of vacancy.
Commercial properties can take longer to find tenants than residential ones. It makes sense to factor this in to your calculations. For example, you may want to assume that your property will be untenanted for a month so you would deduct one month’s worth of rent from your income.
Calculating net yield
To calculate net yield, you need to deduct all the expenses (ongoing costs + cost of vacancy) from the annual rental income (weekly rent x 52). You then divide that number by the property’s purchase price and times it by 100. This will give you the percentage yield.
Net yield = (weekly rental x 52) – costs / property value x 100
For example, if you buy a property for $750,000 with an annual rental income of $78,000 ($1,500 a week) and yearly costs of $12,000, you would get a net yield of 8.8%.
In this example, the costs include $5500 of ongoing costs and $6500 for one month unrented.
Obviously this is just an example. You will need to review each property on its own merits.
But understanding how the net yield has been calculated (what it includes and excludes) will help you make a more informed decision when investing in a commercial property.
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