Calculating the yield of a real estate property
Yield is a crucial metric that every investor must know how to calculate to assess the expected profitability of their real estate investment.
This involves calculating the ratios known as gross and net yield based on data provided by the seller or the management company responsible for the property, for example. In this article, we explore the definitions and calculations of these ratios according to the Swiss real estate appraiser's manual.
Gross Yield
This is the percentage of rental value/rent relative to the market value (or sale price).
Expressed using the formula: Net rents (excluding charges paid by tenants) / Purchase price
Net Yield
Net yield is the ratio of net rental income surplus to total capital. It is expressed as a percentage per year.
Expressed using the formula: Net profit / Equity
Here is a calculation to illustrate this difference:
| Purchase price of the property | Including acquisition costs (transfer tax, land registry, ...) | CHF 1,200,000 |
| Mortgage | CHF 700,000 | |
| Equity | CHF 500,000 | |
| Net rental income* | CHF 54,000 | |
| Gross Yield | CHF 54,000 / CHF 1,200,000 = | 4.5% |
| Operating, maintenance, and financial expenses | CHF 24,000 | |
| Profit before taxes | CHF 54,000 – CHF 24,000 = | CHF 30,000 |
| Net yield on equity (before taxes) | CHF 30,000 / CHF 500,000 = | 6.0% |
*Net rental income (excluding tenant charges)
Key Takeaways
We can conclude that gross yield is very simple to calculate but does not provide a solid basis for making an investment decision.
For this reason, Imvesters calculates and presents in the detailed property sheet of real estate listings on its platform the net yield on equity (before taxes).
Additionally, an investment simulation is available on the Imvesters website.
