Term Of The Day: Yield

Yield is the annual return on an investment. Yield is often expressed in percentage, based the cost of an investment. 

PropGuide Explains Yield

Real estate investors often calculate the yield before they decide to invest in a piece of property. Even though people often confuse yield with capital gains, yield is calculated based on annual income, and not on the increase in the value of a real estate asset. While calculating yield, operating cash flows are taken into account, but long-term appreciation is not. In commercial real estate, yield is calculated by dividing the annual rental income by the cost of the property. 

While investing in real estate, calculating the yield is important because it helps investors to compare the returns from different possible avenues of investment. When the yield is high, it means that the investor will soon be able to earn back the amount they had invested in property. When the yield is low, it means that it would take long for the investor to earn back the amount they had invested in property. When the yield is high, the risk involved in a real estate investment is low. When the yield is low, the risk is high. 

A common mistake made by real estate investors is to decide to invest their money in an asset without estimating the yield. In India, though the appreciation in the value of a property is often high by global standards, this is not true of the yield. Real estate investment in the US, for instance, is considered stabler despite lower appreciation because the yield is higher. 

Check out PropGuide's comprehensive guide to real estate terms here.

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