Understanding what your property REALLY pays you
Yield (verb) – to produce or provide.
Yield (noun) - the amount of product produced off agricultural land.
Think of a farm
I always find it helpful if you think of it like this. The land is your asset. The crops you grow on it give you a yield, which is what your asset produces for you.
In property terms, your land has a building on it (crops) that produces an income (yield). So, when we talk about a yield in property terms, we mean the total annualised net (after expenses) income that your asset (capital) earns for you.
R1 million in the bank
If you have R1M in the bank, and the bank paid you a total, after costs, of R100,000 interest during that year, your yield (interest earned off your capital) would be 10%.
When we talk about a yield in property terms we are generally referring to the income your asset will produce (all things being equal) during the year ahead.
Watch out for extras
It is very important to note that a yield calculation does not include the cost of finance (as it assumes a cash transaction). Nor does it take into consideration your tax liabilities (although this calculation would always be net of VAT).
Yield also does not indicate whether you will need to put money into the bond every month. These would all factor into your cash flow calculations, which are different to yield. (You must understand both, so keep an eye out for my upcoming post on cash flows.)
Real-world application
Now that you understand the concept in principle, let’s apply it:
You buy a property for R1M.
The property has a tenant paying R12,000 (ex VAT) per month.
The property has the following expenses that are not recovered from the tenant:
Rates and taxes: R1,000
Maintenance: R500
Insurance: R150
Total: R1650
Your total NET income (income after expenses) is R10,350 per month, or R124,200.00 per annum.
The formula:
Annualised net income, divided by purchase price, x 100
(R124,200.00 / R1M) X 100 = 12,42% yield
And that, folks, is how you calculate yield!
For assistance with your yield and professional property services, contact Kat here.
