“Yields can indicate whether an area or a deal might make financial sense!”
A yield indicator indicates if a deal is a good deal. To make a buying decision, one should always use the ROI (Return On Investment) calculation.
Gross Yield gives you a sense of the rental income relative to its purchase price. To calculate the gross yield, divide the annual gross rental income by the purchase price then multiply by 100 to express it as a percentage. The gross rent is the full rent at the end of the month before you deduct any operating, financing or tax expenses.
Gross Yield = (Annual Gross rent/Purchase Price) * 100
Note: Annual gross rent = monthly rent * 12
For instance, imagine your investing in an area like Berea, JHB. The average price for a 2 bedroom flat in Berea is R250 000. The average rental for a 2-bedroom flat is R5 500.
Your gross yield would be:
((R5 500 * 12)/R250 000) * 100 = 26,4%.
This percentage must be used in conjunction with the countries lending rate. In South Africa (at the time of writing this) the prime lending rate is 10,25%. Your gross yield is an indicator whether your rental income could pay off your bond and still have money left over.
The net yield tells you your return after removing expenses. The calculation is as follows:
Net Yield = (Annual Gross profit/Purchase Price) * 100
Let’s take the Berea example above to explain. Imagine that your monthly expenses are R4 500 (including bond, levies, rates and taxes and provisions).
Your monthly profit (i.e. cash flow) is R5 500 – R4 500 = R1 000.
Therefore, your net yield would be:
((R1 000 * 12)/R250 000) * 100 = 4,8%
These are just indicators, remember that you need to use the ROI to make a buying decision. Because through the ROI calculation, you will understand how hard the money you’ve invested into the deal is working.