Would you like to know what returns real estate should generate? The value of the real estate yield mentioned in the media is 3-6%. But what yields are there at all? What are the correct definitions of yield types? What is a good yield on real estate? And what yield is interesting for you as an investor? Find out in this article.

Yield Types

Would you like to know how much your rented property will earn you? This is what you do with the calculation of the net rental yield:

Net rental yield

net rental income x 100 / (Purchase price + Additional Costs)

Return on equity

Would you like to calculate the increase or decrease in value to your invested capital? You can find out this value by calculating the return on equity. In the following article you will receive valuable information about this form of return calculation. With these you can increase your real estate yield to 30-40%!

Profit after tax x 100 / invested capital

Overall Return

You want to compare your different investment objects? Then you have to calculate the total return on investment. Here you calculate as if you had financed the yield property completely from your own resources. The financing is not taken into account when calculating the total return on investment!

Annual net rent x 100 / total capital

Which types of returns are interesting for you as a real estate investor?

In short, when we talk about real estate returns, we mean the return on equity. We are only interested in what we have invested and what we get back through it.

Another advice is to use the net rental return for the rental yield. The reason for this is that all costs are included in this return. You can also compare this return with that of securities.

Benefits of using these ratios

In short, there are two main reasons to use these metrics: fast cash flow calculation and fast purchase price estimation.

An example: Let’s say the property has a net rent yield of 6% and the purchase price is $100,000. Then you know that the net rent is $6000. In addition, you can offset the 6% with the interest burden and repayment.

Another note: The rental yield depends strongly on the location of the property. In general, the rental yields in the city are lower than in the countryside because of the higher purchase prices. As a rule of thumb, you should achieve at least a yield of 3%, in the countryside at best significantly higher.

How to boost your return on equity

As mentioned above, the Return on equity is calculated by

Profit after tax x 100 / invested capital

There are two ways to increase the return on equity. Either you increase the profit, which is hard to influence. Or you reduce the invested capital.

With this trick you can increase your return on equity from 8% to 30% or more.

Example

Purchase price: $100.000

Net rent : $5,000

Investment: $10,000

According to the formula above, this results in a net rental return of 4.5%. We still assume an increase in value of 3% and receive a overall return of 7.5%.

If you pay the debt interest and the repayment through the rental income and only bear the incidental costs, i.e. the $10,000 of equity capital, then your profit includes the 2% repayment. Because it concerns here repayment and asset increase plus 3 per cent increase in value.

So you have a profit of $5,000. This you divide by the used capital of $10,000 and come on a net yield of 50%. The same real estate, the same rental income, but only one tenth of the invested capital. And thereby you come on a own capital funds return of 50%!

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