Net rental yield

Net operating income divided by price - rent after vacancy, management, maintenance, insurance, local property tax and any service charge, but before financing.

Example

Net operating income of 12,792 on a 300,000 property is a net rental yield of 4.264%, which is 53.3% of the 8.00% gross figure.

Important

Financing is deliberately excluded, so two buyers of the same building compute the same number. Including the mortgage produces a figure that cannot be compared with any other property.

Related terms

• Gross rental yield — Annual rent divided by price, before any cost is deducted. The figure quoted on almost every property listing aimed at investors.
• Net operating income — Rent or trading income after every cost of running the asset except financing - management, maintenance, insurance, tax and an allowance for periods standing empty.
• Capitalisation rate — The required annual return used to convert an income stream into a price, most commonly in property. Value is net operating income divided by the rate.

Lessons that explain it

• Three instruments that happen to share an underlying asset — Owning a building, owning a listed property company and owning a slice of somebody else's deal are not three versions of one investment. They differ in almost everything except the bricks. (10 min)
• Gross yield is not a yield — Rent divided by price is the number every listing quotes and no owner receives. Take the five deductions out and Property P's 8.00% becomes 4.264% - and the two halves of the return turn out to be far less connected than they sound. (12 min)
• Appraising one property: the numbers, the condition, the tenant and the exit — Seven checks on one specific building. The two that decide most outcomes - the deduction list and whether the income covers the borrowing - are the two that never appear in a listing. (14 min)

All 578 terms in the Investing glossary