Rate of Return, Yield

Usually, yield is only based on rental income, whereas a total rate return includes capital gains. If you are trying to make a decision to buy or not a property both measurements are important

Yield is similar to CAP RATE cap rate and is basically the yield of a property over a one-year time assuming the property is purchased on cash.

However, the total rate of return of a Real Estate property has 2 components – One generated by the rental income, the other by the increase ( or decrease ) in value of the property

First, we need to calculate the NOI or Net Operating Income

Total Rate of Return = ( NOI + Capital Gain ) / (initial price )

= NOI / (Initial Price) + Capital Gain / ( Initial Price )

= Rent Yield + Capital Gain Yield


The Beginning of the period property value is $500,000

The property brings a NOI of $65,000 which gives us a gain of

Rent Yield = $65000/$500,000 = 13%

Also the property value at the end of the period is $550,000

That gives a Rental yield of $50,000 / $500,000 = 10%

Total Rate of Return = ( $65,000 + [$550,000 – $500,000]) / $500,000 = 23%  Prices

One More Example

According to Zillow last year Residential Real Estate Value in the United States have gone up 16.7% over the past year and Zillow predicts prices will rise 12.1% in the next year (2021 – 2022)

Real Estate Value in the long run in the US grows by an average 3.5% per year

Now it is up to you to choose a value for Capital Gain either 12.1% or 3.5% – I will rather be conservative so I will use 3.5%

So if we do not have a better estimate of the future value we can calculate it this way

Total Return = NOI / Cost + 3.5%

Returns from Real Estate vs Stock Market returns

The average return of the S&P 500 has been around a pretty healthy 10% per year in the past 20 years. How does that compare with the returns of real estate? Well if you buy a property and you do not rent it out you can expect a return of 3.5% minus holding which will not leave you much. However, if you manage to rent out the property for a 6.5% CAP rate since you can expect also a 3.5% average appreciation the two returns are comparable. Therefore it is always better to have an investment in both since diversification lowers the risk


While it is true that Total Yeld = Rent Yield + Capital Gain Yield

The investor does not see the Capital Gain Yield until he/she sells the property. That does not happen your cash flow. There is however one more item that cannot be considered officially an income but helps your cash flow: Depreciation

 Depreciation is a deduction that reduces the investor’s taxable income.

Any residential investment property will depreciate for 27.5 years, any commercial property for 39 years. This equates to a 3.636 percent deduction from your income tax of the cost base each year for residential. This will allow keeping in your pocket ( at least for a while ) 3.636% of the value of the structure on your property ( land does not get depreciated). Depreciation will continue for up to 27.5 (or 39) years or until you sell the property, whichever comes first.

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