When investing, one of the most crucial aspects is understanding and comparing the potential yield from different deals. Yield serves as a fundamental metric that helps investors evaluate the profitability of an investment.
In a nutshell, Yield is here to be able to compare deals between them.
The most important is to compare deals with the same formula.
Gross Yield is here to have a macro approach. It provides a broad view of an investment's potential profitability.
It is calculated:
Gross Yield = Annual Rental Income/ Purchase price
Gross Yield (with costs) is more precise in terms of "all the amount" to put on the table to have an asset working.
It is calculated:
Gross Yield (with costs) = Annual Rental Income/ (Purchase Price + All Purchase Costs)
Net Yield is considering the Cashflow (Rental income minus cost), so we take into account of monthly costs to run the asset.
It is calculated:
Net Yield = Annual Cashflow/ Purchase Price
And finally, with the Net Yield (with costs) you factor everything: Purchase Price, Costs, Rental income and Running Costs
It is calculated:
Net Yield (with costs) = Annual Cashflow/ (Purchase Price + All Purchase Costs)
For additional information, the "Taxes" (Capital Gain Tax and Profit Income Tax) are not taking into account here as this is something "personal", it is different for each investor. This is what we ton need it (at the first stage) to assess and compare deals between them.