How do you determine yeild?

[Compropmanager]

Ok so I have seen alot of people throw around figures of yield on their investment properties. (for the moment lets forget capital gains)

The question I have is are these nett yeilds or gross yields.

In commercial when the tenant pays "all" outgoings do you include these in your yield.

I.E.
CIP purchased at 210k (nice 200m2 factory you put 95k into it)
Interest costs of say $10k pa ($125k LOC @ 8%pa)
Outgoings of $4k (insurance, maintenance, council rates, Water rates managment fees, you name it they are here)
Rent of $13k pa

Ok so here is how I work it out
Rent + Outgoings - Loan Interest = 7k
so 7k divided by the 95k you laid out = 7.36% (gross)

or should you work it out like this as one of my landlords did?
Rent - interest = 3k
3k divided by 95k = 3.15% (nett)

I view a tenant paying these outgoings as income, it is a bill that you otherwise would have to of paid (some of them anyway) in the above example when you work it out my way you can get a gross yield 7.36% easierly on a 210k factory.

Its like a 210k house paying around $325pw

When talking about expected returns from CIP should you be looking for Gross yields of 6 - 7% or Net yields of 6 - 7% should we assume that when someone states a yield that it is gross or nett

Your thoughts please.

 

[Dawn]

Outgoings is not income, so can't be added.

Yield is always calculated on net income. If all outgoings are paid by the tenant then Gross Passing Yield = Current Actual Rent/Purchase Price.

 

[Compropmanager]

so then it is.

13k/210k = 6.19% Gross passing Yield.

why not include the outgoings, if you own resi you have to pay for them and on the income statement it looks like:

Income:
13k rent
4k contribution to outgoings

Expenses:
4k outgoings

Nett income = 13k (prior to finance costs if you have them)

17k/210k = 8.09% Gross passing Yield

either way does this mean that nett yield is 13k - 10k in interest = 3k profit so...

3k/210k = 1.42% being return on capital. a very sad return indeed.
or
3k/95k = 3.15% being ROI. still not that good.

 

[Dazz]

Your thoughts please.

There is a consistent and constant definition for nett yield in the industry, it is not up for argument, nor does it change depending on which oddball Landlord you decide to chat to.


Nett yield = Nett Rent / Purchase Price.


Nett Rent is defined as Gross Rent - Outgoings.


For CIP if you have a good Tenant on a good Lease, Outgoings paid by the Landlord = zero, so nett rent = gross rent.

For RIPs, outgoings are usually huge, up to 25 or 30% sometimes, that's why Banks only take 70% of the gross income for debt serviceability.


It has absolutely nothing to do with any interest payment. Interest payments, if any, don't even come into the equation.


Working it this way, the nett yield becomes a useful tool, as it can be directly compared to ;

• Bank Interest on Deposits
• Bank Interest payable on Debt (if Nett Yield > Interest the prop is CF+ve)
• Share Divs (ignoring the yummy ICs)

In your example, the nett rent is 13K, therefore on a purchase price of 210K, the nett yield is 6.19%.

 

[Compropmanager]

Thanks Dazz,

is the ROI bit right i.e. 3k/95k = 3.15%

 

[Dawn]

That would be your net ROE.

 

[brendio]

But it's not your total return on equity. That would also include your net capital gain/(loss) as well.

 

[Dawn]

But it's not your total return on equity. That would also include your net capital gain/(loss) as well.

Thats right. But you will only get the total return once you dispose the asset, unless you can calculate unrealised gains/losses.

 

[Leghorn]

Dazz is correct, you don't take into account gearing, gst or purchase costs as well. It is simply the net income to the owner divided by the purchaseprice/value.

This percentage is also called the initial yield.