 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| How to Calculate the Yield |
Remember the terms Yield, Capitalisation Rate, Cap Rate and Return are all used interchangeably. They all
mean exactly the same thing.
The free capitalisation calculator shows you how to apply the yield percentage to a known rental return in
order to calculate a Market Value.
However, before you apply the yield to the rental stream you need to figure out what it should be in the first
place.
Again this is done from analysis of other sales of similar types of properties.
You must obtain two (or three) pieces of information about the completed sale depending whether you wish
to calculate the Gross Yield or the Net Yield. The first two pieces of information you must have regardless:
Example:
Say there is a recorded sale of a similar type of property at $520,000. The rental income (excluding GST) is
$45,000 and the running expenses (rates, insurance, etc) are $4,500. What are the Gross and Net yields.
Again the mathematics are straightforward:
Gross Yield is:
Gross Rental ÷ Sale Price = Gross Yield
$45,000 ÷ $520,000 = 8.65%
Net Yield is:
(Gross Rental minus Expenses) ÷ Sale Price = Net Yield
$40,500 ÷ $520,000 = 7.79%
Applying the Yield to an Income Stream
The rule is very straightforward but the application is much more complex. The selection of an appropriate
yield to apply to a subject property is a matter of you deciding the level of risk.
Say you analysed three sales on a net basis using the mathematics described above:
Property 1 – Yield is 7%. This is a more modern property in a similar location.
Property 2 – Yield is 8%. This is a similar age and quality property but less desirable location.
Property 3 – Yield is 7.6%. This is similar in age, quality and location.
Which yield would you pick?
Well this comes down to a matter of judgement. Some investors might take an average. We don’t think that
this is the correct approach. In this case we would pick a yield of around 7.5% or 7.6%.
Should you use a Gross Yield or Net Yield?
If you are dealing with commercial or industrial properties, you should only use the Net Yield. This is
because expenses can vary widely between buildings, so to use gross yields would be misleading.
However, with residential investments where expenses tend to be fairly uniform, gross yields are acceptable
in most instances.
In the latter case if you choose to use Net Yields, then you must ensure that all of your comparison properties
are also analysed on a net basis. Otherwise you are not comparing “apples with apples”.
mean exactly the same thing.
The free capitalisation calculator shows you how to apply the yield percentage to a known rental return in
order to calculate a Market Value.
However, before you apply the yield to the rental stream you need to figure out what it should be in the first
place.
Again this is done from analysis of other sales of similar types of properties.
You must obtain two (or three) pieces of information about the completed sale depending whether you wish
to calculate the Gross Yield or the Net Yield. The first two pieces of information you must have regardless:
- The sale price.
- The rental income of the property (if it is a commercial property, the income excluding GST).
- The landlords expenses – rates, insurance, maintenance allowance, management expenses.
Example:
Say there is a recorded sale of a similar type of property at $520,000. The rental income (excluding GST) is
$45,000 and the running expenses (rates, insurance, etc) are $4,500. What are the Gross and Net yields.
Again the mathematics are straightforward:
Gross Yield is:
Gross Rental ÷ Sale Price = Gross Yield
$45,000 ÷ $520,000 = 8.65%
Net Yield is:
(Gross Rental minus Expenses) ÷ Sale Price = Net Yield
$40,500 ÷ $520,000 = 7.79%
Applying the Yield to an Income Stream
The rule is very straightforward but the application is much more complex. The selection of an appropriate
yield to apply to a subject property is a matter of you deciding the level of risk.
Say you analysed three sales on a net basis using the mathematics described above:
Property 1 – Yield is 7%. This is a more modern property in a similar location.
Property 2 – Yield is 8%. This is a similar age and quality property but less desirable location.
Property 3 – Yield is 7.6%. This is similar in age, quality and location.
Which yield would you pick?
Well this comes down to a matter of judgement. Some investors might take an average. We don’t think that
this is the correct approach. In this case we would pick a yield of around 7.5% or 7.6%.
Should you use a Gross Yield or Net Yield?
If you are dealing with commercial or industrial properties, you should only use the Net Yield. This is
because expenses can vary widely between buildings, so to use gross yields would be misleading.
However, with residential investments where expenses tend to be fairly uniform, gross yields are acceptable
in most instances.
In the latter case if you choose to use Net Yields, then you must ensure that all of your comparison properties
are also analysed on a net basis. Otherwise you are not comparing “apples with apples”.
 |  |  |  |  |
| Free Calculators |
Innovation + Experience |
| PO BOX 9018, Wellington 6141 | phone: (04) 240-0124 | fax: (04) 232-4414 | email: valuer@ vcnz.co.nz Innovation + Experience |