The Most Important Factor When Investing in Real Estate: Yield

For anyone who is considering buying a property, you will surely be interested in what return the property will give you – in other words, the property’s yield. In this article I'll go through why yield is so important to understand, and how to calculate it.

This is you after you’ve learned about net yields

First, what is yield?

A real estate yield is a measurement of future income on an investment based on how much you paid for it.

There are two types of yields: "Gross Yield" and "Net Yield (also called real yield)".

Because property-sites love to make their houses look like more amazing investments than they are, they mostly show the properties’ gross yield.

The gross yield can be calculated by the following formula:

Gross Yield = annual rent income ÷ property purchase price

A gross rental yield is the income on an investment prior to expenses being deducted.

However, the gross yield does not include brokerage fees, property taxes, repair costs, etc. at the time of property purchase.

Here’s where the net yield comes in. As it is calculated by including initial- and operational costs, it is a much better yield estimate than the gross yield.

Net Yield = annual rent income ÷ (property purchase price + costs at the time of purchase + annual cost)

When looking at real estate investment, it is important to always calculate its potential net yield rather than its gross yield.

However, it is not good to look for properties by solely focusing on high yields. Properties with the highest yields are almost always in in rural areas because property prices are much lower, so yields become substantially higher (remember: yields are calculated by annual rent income ÷ property purchase price).

Therefore, in urban areas, even if the yields are lower, properties are less likely to become vacant, and as a result it is easier to obtain a stable rent income.

Lastly, let’s not forget asset value appreciation. If you decide to sell your lovely property, you’ll very likely be able to do so with an increased value in attractive locations. In rural area, you might lose money on the sale or not be able to sell your property at all…

What Net Yields can you expect in Japan?

Below are the expected net yields of studio condominiums and family-friendly condominiums in major cities across the country:

* Source: 45th Real Estate Investor Survey
* October 2021 Survey

This means that if you buy an apartment in Fukuoka for JPY 10,000,000 ($78,079) and sell it after 10 years for the same amount, you would still make JPY 6,288,946 in pure profits!

Now that you have learned the importance of Net Yields in relation to real estate investments, we can take a closer look at the insanely attractive Japanese property market…in next week’s article!