Factors That Affect Rental Yield

What is yield?

In commercial investment, yield is a quick way to assess the rate of return a property will generate whilst you own it. It doesn’t consider loan repayments of value changes.

Gross yield describes the rate of return a property generates in the form of rental income as a proportion of its sale price or value.

Net yield is the same calculation but with outgoings, such as land tax, insurance and rates added when calculating the income generated from a property. Net yield is also sometimes known as the capitalisation rate.

So if you bought your property $2,000,000 and generates $150,000 rental return your gross yield will be 7.5%. If you deduct outgoings of $30,000 from your rental return you will be getting $120,000 income and 6% net yield.

How regularly do they conduct inspections?

Your Property Manager should inspect your investment property a minimum once a year. A detailed report should also be provided after each inspection.

How are they addressing maintenance?

It’s important to ensure that your premises are regularly checked for fire safety, the air-conditioning is regularly serviced, if there are electronic doors or gates that these are serviced and awnings comply with Council regulations to mention a few items. There are a host of other factors which need to be considered depending on the property. Is your property manager looking after these matters efficiently and are they pro-active?

How do yields for commercial property compare to residential ?

Commercial real estate typically has higher yields than residential real estate and is often considered as an investment for cash flow. Residential investment generally anticipates capital growth and lower yields. Over the last few years, this has changed especially for industrial property, which has seen strong capital growth.

Traditionally however capital gains are relatively low in commercial property because it is an illiquid asset type, with longer lease terms and longer holding periods. Higher deposits and fees are generally incurred for commercial property lending compared to residential, so commercial property values tend to be less inflated through lending conditions.