Basics of real estate investment

What is real estate yield?

What is real estate yield?

In recent years, Japan's population despite the fact that it has reduced, and there is a housing oversupply, the price of real estate is in the downward trend.

Decline aspects of real estate, because the chance of a great investment, whether it would not be many people that are considering real estate purchase on this occasion?
Under these circumstances, that many people considering the purchase of investment real estate is an indicator, it is the "yield".

The real estate yields, it is a measure that determine whether the benefits of how much in one year for the property purchase price obtained.

Risk of high-yield real estate

Most of the yield listed in the property information, commonly referred to as "surface yield", it is a number in which the real estate is obtained by dividing the annual rent of the case was fully occupied in the real estate purchase price.

Surface yield (%) =
purchase of annual rent ÷ real estate at the time of full occupancy price × 100

The higher the yield is high real estate, it is thought that it real estate suitable for investment.
In other words, this surface yields better of 10% of the property, you will be referred to a higher profit than 8% of the property.
However, there are significant pitfalls to this idea.

For example, property prices 30 million surface yield 4% in yen, and real estate (A) year revenue is 1.2 million yen, the same year revenue is very good look at the yield 8% in one thousand five million yen property prices to a 1.2 million yen You have a real estate (B) conditions.

Real Estate (A)

Purchase Price: ¥ 30 million

Surface yield 4%

Revenue: 1.2 million yen / year

  • ・Good location of city center
  • ・Prospective tenants number
  • ・Always full occupancy
  • ・Appreciation is expected in the future
  • ・Easy to resell

High value = High property prices

Real Estate (B)

Purchase price: 1 thousand 5 million yen

Surface yield 8%

Revenue: 1.2 million yen / year

  • ・The outskirts of the regional cities
  • ・A high vacancy rate
  • ・It takes time until the residents are determined
  • ・There is a possibility that the lower future rents
  • ・Difficult to find a buyer

A low value = Cheap property prices

It will can be such a difference in how the same rent?

If you examine the property in detail, the real estate (A) is located in a good location, the room is always fully booked, a new shopping mall planned close by, it is expected likely to raise the future rents. On the other hand, real estate (B) is in a location away from the city center, it does not appear to invite residents. It is likely to be falling rents along with the decrease in the population of the region. Since the surface yield is a percentage of the time of full occupancy, there is also a possibility that should not be a 1.2 million of revenue if continued vacancy.

When I compared, the real estate (A) and (B), which is whether the high value of the property, it is obvious. Of course, since the value also increases the price of higher if property, people of real estate (A) will lower yields higher purchase price for the same income.

In this way, the higher-yielding properties in real estate investment, risk would be better that had in mind the fact that large.

Cap rate

In addition to surface yield also, one of the index representing the yield of real estate, there is a concept of "cap rate".Which is also referred to as cap rate, although there are several ways of finding, here we introduce a formula that is often used as a determination index when performing the real estate investment to professional investors.

The cap rate is the number obtained by dividing the operating profit before amortization of real estate in the real estate purchase price.

Cap rate (%) = before amortization Operating income ÷ real estate purchase price × 100
*before amortization Operating income = expected annual rent - Estimated annual cost

Expected annual rent is the amount obtained by subtracting the assumed amount of vacancy-credit losses from fully occupied at the time of the annual rents (rental room rental income ∔ parking revenue ∔ common area charges income ∔ other income). How vacancy comes out of the prediction, such as nearby real estate situation is the part that must be research to advance to a real estate company, by pulling this assumption amounts, it will be able to determine more accurately. Expected annual costs, maintenance costs, property tax, city planning tax, is the amount that the sum of the costs, such as property and casualty insurance premiums. For example, if the building is likely to leave large old repair costs, the cost, profit from the real estate will be less.

And, by issuing the operating income before depreciation minus the expected annual cost from this assumption year rent, it becomes the interest rate closer to the actual revenue cap rate.

The purchase of such real estate property, in addition to the information listed in the property information listings, advance research is important. Our company is also capable in researching on the surrounding circumstances and real estate, please feel free to contact us.