Judging A Property Deal On Yield And Exit

Property is often sold on the story: the view, the location, the growth of the area. Professional investors start with two numbers instead: what the property earns each year after costs, and how they will get their money back out.

Gross yield is the brochure number

Gross yield is annual rent divided by the purchase price. It ignores everything that comes out of that rent, which is why it always looks attractive.

Net yield is the real number

Net yield subtracts the running costs before dividing by the full purchase cost:

• Service charges and maintenance
• Management fees
• Vacancy between tenants
• Insurance and any property taxes
• Purchase costs such as registration and agency fees, added to the price

A property advertised at 8% gross can easily fall to 5% net. Compare that with what quality bonds pay today before committing.

Liquidity and exit

A share can be sold in seconds. A property can take months, and the price you get depends on the market at that moment. Before buying, ask:

• Who will buy this from me, and how many similar units are for sale?
• How long have comparable properties taken to sell?
• What happens to my return if I have to sell in a weak market?

Leverage in property

A mortgage magnifies returns in both directions, just like leverage in any market. Rising interest rates raise the cost of that leverage and can turn a positive cash flow negative.