The yield displayed in property listings is in most cases the gross yield. However, to accurately measure actual profitability, it is essential to understand NOI (Net Operating Income), which deducts vacancy losses and operating costs.
What Are the Limitations of Conventional Yield Metrics?
Here is a summary of the main yield metrics used in real estate investment.
- Gross yield: Annual rent ÷ property purchase price. Looks higher than reality because expenses are not deducted
- Net yield (NOI yield): (Annual rent − various expenses) ÷ (property price + acquisition costs). Closer to reality
- Own capital investment yield: Rental income ÷ own capital. Used when own capital is substantial
- Post-loan-repayment yield: Shows real profitability including loan repayments
In recent years, rising vacancy rates and increasing operating costs have made it harder to gauge a property's true performance using gross yield alone. This is why NOI has attracted attention as an important judgment metric.
What Is NOI? Understanding the Calculation Method
NOI (Net Operating Income) = Full occupancy rent − Vacancy loss − Operating expenses
Example: Full occupancy rent 1,500,000 yen − Vacancy loss 150,000 yen − Operating costs 200,000 yen = NOI 1,150,000 yen
NOI Yield Formula
NOI Yield = NOI ÷ (Property price + Acquisition costs) × 100
Simplified Calculation Using NOI Rate
NOI rate = Full occupancy rent − (Vacancy rate 10% + Operating expense rate 40%)
- Income = Full occupancy rent × NOI rate
- Profitability = Gross yield × NOI rate
Key Points to Note When Using NOI
For New Properties, It Becomes an Estimated Value
For used properties, actual performance data can be obtained from the owner, but for new properties, vacancy rates and actual operating costs are unknown, so NOI must be calculated using estimates. As one of the comprehensive judgment capabilities in real estate investment, scenario-based sensitivity analysis is effective.
Accurately Grasp the Breakdown of Operating Expenses
Operating expenses include the following (depreciation and interest payments are not included):
- Fixed asset tax and city planning tax (public imposts)
- Insurance premiums such as fire and earthquake insurance
- Management fees, cleaning fees, and common area utility costs
- Routine repair costs, advertising costs, and management company fees
Simulate Rent Market Changes from Multiple Angles
Real estate tends to see rent declines over time. By conducting NOI yield simulations across multiple scenarios that account for age-related deterioration, you can make investment decisions that are not swayed by short-term yield figures.
Related Reading
Frequently Asked Questions (FAQ)
- Q. Are NOI and net yield the same thing?
- A. They are used almost synonymously, but strictly speaking, NOI yield adds acquisition costs to the denominator. It is also called pure yield or net yield.
- Q. What is the basis for the 10% vacancy rate and 40% operating expense rate figures?
- A. These are general industry assumptions. They vary by area and property type, so please adjust by referencing data from specialized institutions or property management companies.
- Q. Is a property with high NOI always a good investment?
- A. NOI is an important metric, but comprehensive judgment that also covers the area's rental demand, future rent market prospects, renovation plans, and exit strategy is necessary.
- Q. How do cap rate and NOI relate?
- A. Cap rate = NOI ÷ property price. Even with the same NOI, if the property price is high, the cap rate will be lower. It is used to judge the price appropriateness of a property.
