Understanding Yield on Commercial Property Investment

At a time when bond and fixed-income rates are at record lows, commercial real estate investing can present very appealing opportunities for investors looking for a reliable income stream.

There is no doubt that commercial real estate is a more profitable investment than residential real estate since it not only generates a steady income over the long term but also produces a higher return on investment.

In today’s market, the main question is, how do you figure out if a commercial property is yielding a good return?

Property Yields Explained

In order to determine the future income of an investment, one of the most important factors is its yield. Commercial real estate yields are especially crucial since capital growth rates in the market are often lower than those in the residential market.

It is therefore critical to consider the return you will receive in the present and in the future when deciding whether or not to invest.

Commercial property yield is driven by the demand for property and the high demand for investment properties increases the cost of purchasing one. In general, the higher the purchase price, the lower the yield will be—unless the rental income increases proportionately. 

It is also true in the opposite direction. Prices of property can fall when the demand for it is low, which can lead to an increase in yields. 

Note that yields are only an indication of your investment’s expected return and are not a guarantee. It is also important for potential investors to consider all the other factors that may affect their ability to achieve their expected yield, such as the likelihood that they can find and retain a good, long-term tenant, maintenance and infrastructure costs, property suitability, and location.

Two Major Types of Yield

In commercial real estate investment, property yields can be divided into two major categories. Even though they are quite similar, they use different metrics, which causes their final results to be different. 

1. Gross Yields

An investment’s gross yield is the return on investment when no operational costs are taken into account. The gross yield of a property is calculated by dividing its annual rent/income by its purchase price, then multiplying it by 100.

2. Net Yields

Compared to gross yield, net yield takes into account and subtracts the operational costs of a property. You can calculate a property’s net yield by subtracting all spending made on the property from its annual income, dividing it by the purchase price, and multiplying by 100.

Usually, commercial properties are marketed with a net rent, which means tenants pay both the base rent and the base property expenses. Although it is not uncommon for commercial property to market a gross rent, where the property’s outgoings are factored into the asking value.

How to Drive Yield on Commercial Real Estate Investments

The top three drivers of the commercial real estate market are yield, business confidence, and occupancy rates.

Each of these three factors is affected by consumer confidence, politics, and the economy. There is more vulnerability to market conditions for a commercial property’s yield than for a residential property due to the necessity of people having somewhere to live—whereas businesses can fail and do. It is this risk that encourages commercial property to generate higher yields.

A few proven methods can help commercial real estate investment owners significantly increase their properties’ yields:

  • Raising the rent paid by tenants 
  • Spending less money on operations
  • Keeping your property in top condition with renovations, reconstructions, and routine maintenance

Make Wise Investment Choices with Saint Investment Group

When investing in commercial real estate, yield is an important factor to consider. Additionally, other factors need to be considered in addition to commercial property yields, such as future development potential, vacancy rates, the investor’s financial situation, and their commercial real estate strategies.

The commercial property market can be an excellent investment area for investors who have clear investment goals and a solid financial position.

If you are looking for commercial properties to invest in for the future, a seasoned real estate expert who knows the commercial property market may be able to help you find the best option.

In spite of the risks involved in commercial real estate investments, it still offers a stable source of long-term income. Investing in real estate with a company like Saint Investment Group will ensure a high yield for your property.

We will provide you with more information regarding commercial real estate investments by emailing info@saintinvestment.com or by contacting us at 949-881-7128 at Saint Investment Group today!