The first number to check when managing an apartment is the yield. However, if you make a purchase decision solely based on the yield displayed in the advertisement, you may end up with less money left than expected. This is because most advertised yields are surface yields that assume full occupancy, and do not fully reflect vacancies, management costs, repair costs, taxes, and acquisition costs.
Yield is not a simple indicator that higher is better. Properties that appear to have higher yields may include vacancy risk, repair risk, and risk of falling rents. What owners should look at is the real yield, which is closer to the actual cash flow, rather than the surface yield.
Key points of this article
- Surface yield is a simple index calculated by dividing the annual full-occupancy rent by the property price.
- Real yield is an indicator that measures profitability, including expenses and acquisition costs.
- Yields can drop significantly when vacancy rates, repair costs, and interest rate increases are factored in.
- For high-yield properties in local areas, be sure to check demand and exit strategy.
- Before purchasing, you should look at the advertised yield, real yield, and cash flow after repayment separately.
What is the yield of apartment management?
Yield is the percentage of the amount you invest that shows how much you can earn per year. In apartment management, calculations are made using the property price and annual rental income.
However, there are multiple types of yield. The surface yield, which is often used in advertising, the real yield, which includes expenses, and the cash flow yield, which measures the amount left over after repaying the loan, all have different meanings.
| Metric | What to include in the calculation | How to use |
|---|---|---|
| Surface yield | Annual full-occupancy rent, property price | Rough comparison of properties |
| Real yield | Rental income, operating expenses, acquisition costs | A closer look at profitability |
| Yield after repayment | Remaining balance after repayment of loan | See recovery power for own funds |
Surface yields are also helpful during initial screening. However, when making a purchasing decision, it is necessary to check the real yield and the cash flow after repayment.
Calculation formula for surface yield and real yield
The formula for calculating surface yield is simple.
```text Surface yield = Annual full-occupancy rental income ÷ Property price × 100
For example, if the property price is 80 million yen and the annual rental income is 6.4 million yen, the surface yield is 8.0%.
```text
6.4 million yen ÷ 80 million yen × 100 = 8.0%
On the other hand, real yield takes into account management costs, repair costs, property taxes, insurance premiums, advertising costs, vacancy losses, etc.
```text Real yield = (annual rental income - annual expenses) ÷ (property price + acquisition costs) x 100
Even for the same property, if the annual expenses are 1.6 million yen and the acquisition costs are 5.6 million yen, the real yield will decrease as follows.
```text
(6.4 million yen - 1.6 million yen) ÷ (80 million yen + 5.6 million yen) × 100 = approximately 5.6%
It is not uncommon for an advertised rate of 8.0% to be in the 5% range in reality. If you purchase without understanding this difference, your cash flow will be more difficult than you expected.
How does the yield change if you include the vacancy rate?
In apartment management, apartments are not always fully occupied. Vacancies may occur due to the period between moving out and the next move in, reviewing recruitment conditions, and delays in restoration work.
| Conditions | Annual rental income | How the real yield looks |
|---|---|---|
| Fully booked | 6.4 million yen | Close to advertised yield |
| Vacancy rate 5% | 6.08 million yen | Slight downturn |
| Vacancy rate 10% | 5.76 million yen | Impact on repayment capacity |
| Vacancy rate 20% | 5.12 million yen | Even high yields can be at a dangerous level |
When entering the vacancy rate, check not only the current occupancy rate, but also the frequency of past vacancies, recruitment periods, and surrounding competitive rents. Even if the property is fully occupied, if the rent is set higher than the market price, the rent may be lowered in the next recruitment.
Yield that does not include repair costs is dangerous
For second-hand apartments, repair costs may be incurred immediately after purchase. Items such as roofs, waterproofing, exterior walls, water supply and drainage equipment, lighting in common areas, and interior design of vacant rooms are often not reflected in advertised yields.
| Repair items | Points to consider before purchasing |
|---|---|
| Rooftop/roof waterproofing | Leakage history, construction period, warranty status |
| External walls/steel parts | Cracks, rust, painting cycle |
| Water supply and drainage equipment | Piping age, leakage history, renewal plan |
| Restoration of interior to original condition | Scheduled to move out, interior deterioration, equipment replacement |
| Common areas | Lighting, security, cleanliness, tenant satisfaction |
Properties that are undergoing major repairs at the time of purchase may appear to have a high surface yield, but may actually be more expensive. Repair costs should be added to the purchase price, not as "future costs."
How to think about regional yields
In general, properties in urban areas tend to have lower yields, while properties in rural areas tend to have higher yields. According to a survey of real estate investors by the Japan Real Estate Institute, the expected yield of rental housing varies depending on the area.
However, high-yield properties in rural areas are not always advantageous. We must look at demographic trends, rental demand, sources of demand such as universities, factories, and hospitals, the management company's responsiveness, and even the depth of the buyer at the time of sale.
| Area characteristics | Risks to watch |
|---|---|
| Urban areas | Acquisition prices are high and yields tend to be low |
| Suburbs | Occupancy rates tend to differ depending on station distance and lifestyle convenience |
| Regional core cities | There is room for consideration if the demand source is stable |
| Areas with declining population | High yields but high vacancy and sale risks |
Yield also reflects risk. Don't just compare the numbers; check why the yield is the same.
Pre-purchase checklist
Before purchasing, we collect advertising materials, rent rolls, repair history, property taxes, management fees, insurance premiums, and borrowing conditions and calculate them using the same assumptions.
- Have you calculated the real yield as well as the surface yield?
- Have you calculated the vacancy rate at 5%, 10%, and 20%?
- Have you checked the repair history and repair prospects for the next 10 years?
- Is the current rent too high compared to the surrounding market price?
- Have you checked the tenant's contract terms and non-payment history?
- Have you looked at your ability to repay the loan if interest rates rise?
- Is the location easy to find a buyer when selling?
When investing in apartments, it is more important to maintain the yield while holding the property than the yield at the moment of purchase. Let's make a decision by looking at management, repairs, recruitment, and financing all in one place.
Frequently asked questions (FAQ)
Q1. Which should I focus on, surface yield or real yield?
A. When making purchasing decisions, you should focus on the real yield. Surface yield is convenient for comparing properties, but it does not reflect expenses or vacancies, so it differs from actual profitability.
Q2. What percentage of return should I aim for when managing an apartment?
A. It depends on the area, age of building, and loan conditions. Please consider not only the yield figure but also the vacancy rate, repair costs, and cash flow after repayment when making your decision.
Q3. Should I avoid high yield properties?
A. There is no need to avoid it. However, there is a reason for the high yield. You need to check risks such as vacancy, repairs, location, decline in rent, and difficulty in selling.
Q4. Should repair costs be included in the yield calculation?
A. You should. Especially with second-hand apartments, repair costs within a few years after purchase have a large impact on profitability. Yields that do not include repair costs tend to be optimistic.
I also want to read
- How to reduce the cost of large-scale repairs? Practical points that rental owners should consider when estimating and placing orders
- Importance of integrated management/brokerage operation to improve occupancy rate
- What are the 9 major risks of apartment management? Systematic risk countermeasures that investors should practice
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