Legal Definitions - income yield

Income Yield (often referred to as Capitalization Rate or Cap Rate) is a financial metric used primarily in real estate to estimate the potential rate of return an investor can expect from an income-producing property. It represents the ratio of a property's net operating income (NOI) to its current market value or purchase price. In simpler terms, it shows how much income a property generates relative to its cost, before accounting for debt payments or income taxes.

Net operating income is calculated by taking the property's gross rental income and subtracting all operating expenses, such as property taxes, insurance, maintenance, and utilities, but *before* deducting mortgage payments or income taxes.

• Example 1: Small Retail Plaza

  A developer is considering buying a small retail plaza for $2,000,000. The plaza generates $180,000 in annual rental income, and its operating expenses (maintenance, property taxes, insurance, etc.) are $30,000 per year. The net operating income (NOI) is $180,000 - $30,000 = $150,000. The income yield would be $150,000 / $2,000,000 = 0.075 or 7.5%.

  Explanation: This 7.5% income yield tells the developer that for every dollar invested in the plaza, they can expect to receive 7.5 cents in net operating income annually, before considering any loan payments or income taxes. It helps them compare this investment's potential return against other opportunities.

• Example 2: Apartment Building

  An investment group is evaluating an apartment building listed for $5,000,000. The building's total annual rent collection is $600,000, and annual operating costs, including property management fees, utilities for common areas, and repairs, amount to $150,000. The net operating income (NOI) is $600,000 - $150,000 = $450,000. The income yield would be $450,000 / $5,000,000 = 0.09 or 9%.

  Explanation: The 9% income yield indicates the annual return on the property's value based purely on its operational profitability. This figure is crucial for the investment group to assess the building's attractiveness as an income-generating asset and to benchmark it against similar properties or their desired return thresholds.

• Example 3: Industrial Warehouse

  A logistics company is looking to purchase an industrial warehouse for $3,500,000 to lease out to other businesses. The projected annual rental income from the warehouse is $300,000, and annual expenses, such as property taxes, insurance, and exterior maintenance, are estimated at $45,000. The net operating income (NOI) is $300,000 - $45,000 = $255,000. The income yield would be $255,000 / $3,500,000 = 0.07285 or approximately 7.29%.

  Explanation: This 7.29% income yield provides the logistics company with a quick measure of the warehouse's profitability relative to its purchase price. It helps them understand the unleveraged rate of return from the property's operations, aiding in their decision-making process for real estate investments.