When looking for income options many individuals consider property investment, specifically commercial property. Property Investments, both commercial and residential may provide opportunities to make new streams of income but when considering a commercial property as an investment there are some technical terms that can throw your mind into a spin; capital gains, LMI, returns, negative leverage, compound interest or specifically yield, but why are these terms important for you to know?
What exactly is yield?
Yield is more than just a word for productivity. In terms of investing, yield describes a percentage of an income you could be earning.
Why is yield important?
Most investors are concerned with an investment's current return and potential yield, and use these figures as the deciding factors for whether or not to purchase the investment in the first place. Yield is simply your investment’s potential.
What's the difference between yield and return?
Both terms are used to describe the performance of your investments. From an investment point of view, returns refer to the gain or loss of a security in a particular period, typically backwards looking as in returns earned in the past, or total returns describe what an investment has concretely earned over time. The return consists of interest, dividends and capital gains and is quoted as a percentage.
Where yield, on the other hand, is forward looking. It measures the income, such as interest and dividends, that an investment earns and ignores capital gains. This income is taken over a time period and annualized, with the assumption that the interest or dividends will continue to be received at the same rate.
There are different types of yield to consider; gross yield and net yield. Gross yield is everything before expenses where net yield is everything after expenses. As an investor you will be more interested in net yield as this takes into account the expenses you will incur if you invest in commercial property.
How to calculate
To calculate net yield deduct all the expenses (ongoing costs + costs of vacancy) from the annual return income (weekly rent x 52 weeks). Divide that number by the property purchase price and multiply by 100.
NET YIELD = (weekly rental x 52) – costs / property value x 100
Here is an example for a property valued at $880,000. The weekly rent is $1,800 and the ongoing costs are $10,000.
Calculations: (weekly rent $1,800 x 52 weeks) – costs $10,000 / property value of $880,000 x 100 = 9.5% yield.
If you have an opportunity to consider investing in property you may have found yourself a new way to add income to your bottom line. Before you start investing in commercial property, however speak to your accountant or your financial advisor to see whether you or your company has the available cash flow to afford an investment.