Definition of Yield
Yield is a rate of return an investor gets on investment. It is mostly expressed in terms of percentage of the amount invested initially. Risk exists in any investment and investment outcomes is a major concern of investor.
While calculating the yield, unrealized gains or losses on the investments which an investor holds should include or else the yield calculated will be based on the interest payments or dividends only. Hence, complete picture of the return on investment could not be present. When the investor has invested in a fund, the yield is calculated by the following formula:
Income generated by the fund minus fund expenses, divided by the investment.
There are two separate formulas to calculate gross yield and net yield.
For calculating gross yield on the rental, the below given formula can be used.
Gross yield = (weekly rental x 52) / property value x 100
For example: Property is purchased for $450,000; weekly rent is $375
Then, using the formula
Gross yield = $$2875 ($375 x 52) = $19,500 /$450,000 x 100 = 4.3%
For calculating net yield, following formula can be used:
Net yield = (weekly rental x 52) – costs / property value x 100
For example, if a person buys a house for $750,000 with an annual rental income of $78,000, weekly rental of$1,500 and yearly costs of $12,000 then:
Net yield = ($1,500 x 52) – $12,000/ $750,000 x 100
Net yield = 8.8%.
In the above example, the costs include $5500 of ongoing costs and $6500 for one month unrented.