Commercial property yields
Commercial property yields – what, why and how
What is yield?
Yield refers to the earning potential of a property. For example, if a property costs 1,000,000 and was expected to rent for 1,500 a week, the yield would be 1,500 multiplied by 52 (which equals the annual rent), then divided by the purchase price of $1,000,000. In this case, the gross yield would be 7.8 percent.
Whether it costs $250,000 or $1,000,000, the yield indicates just how good an investment it will be and is a useful measure to compare the earning potential of different properties.
Why is yield important?
Yield is more important when it comes to commercial properties because they don’t experience as much capital gain as the residential market. Yield is the way you will make money with commercial property investments.
How can yield be maximised?
The single most influencing factor in terms of yield is the purchase price of the property relative to the projected income you will receive. Other things to consider include:
- Location – properties in popular commercial or metropolitan areas generally have a higher price tag. Don’t discount suburban commercial properties because they can offer strong returns too.
- What type of property? Commercial properties come in all sorts of shapes, sizes and types. Do your research to see which provides the greatest consistent yields. For example, it could be retail, office or industrial.
- Vacancy – The biggest threat to your commercial property yield is vacancy. Before you purchase, do the math so you know what just one month of vacancy will cost you. Next, choose your tenants wisely and look after them.