Among investments, real estate investment is considered to have a relatively good balance between risk and return.
Although real estate investment does not offer the same potential to become a millionaire overnight as FX, the risk of losing all your money in an instant is extremely low.
Above all, it is supported by salaried employees and other investors because of its solidity in providing a fixed amount of monthly rental income.
One of the things you need to know when you start investing in real estate is the "yield.
In this article, we will explain the types of yields, how to calculate them, and the market rate!

Types of "Yields" in Real Estate Investments

Yield refers to how much profit is made, or the percentage (%) of profit made, on the amount invested.
There are two main types of yields: gross yield and real (or net) yield, and we will introduce the difference between each.

Gross yields

Of the yields in real estate investment, the gross yield is the one that is most prevalent.
Generally, the yield offered by real estate companies is this gross yield.
The gross yield is the annual rental income divided by the purchase price of the property.
The figure does not take into account the overhead costs of maintaining the property and assumes full occupancy.
It is not a figure that indicates that this amount of profit will always be generated, so think of it as a way to grasp the superficial yield.

Real (Net) yields

The real yield is calculated by taking into account the purchase price of the property and the annual rental income, plus expenses.
Expenses for property purchase include stamp tax, registration fees, and loan administration fees.
Expenses for real estate management include various taxes, management fees, insurance premiums, and reserve funds for repairs.
Real (or net) yields are fluid, and if the building becomes vacant, the rental income will be lost.
In addition, buildings deteriorate over time, so maintenance costs will rise each year.
Other than that, the expenses to manage real estate vary from year to year, making it difficult to calculate net yields accurately compared to gross yields.

Other types of yields

The most commonly used yields in real estate investment are the gross yield and the real (net) yield.
However, there are other yields as well, such as yield after repayment of loans and yield on own capital investment.
The yield after loan repayment includes the amount of loan repayment in addition to the annual expense factor taken into account for the real yield.
If this yield is not negative, it means that the property is profitable, even if a loan is taken out to purchase the property.
On the other hand, the self-financing investment yield indicates how much profit can be obtained in relation to one's own capital.
The difference is that the yield is basically based on the purchase price of the property, while the self-financing investment yield shows the ratio of profit to the amount of self-financing invested.
However, since gross yields and real yields are typical for real estate investment, we will now explain how to calculate these two types of yields.

How to calculate real estate investment yields

The gross yield is basically calculated by dividing the annual rental income by the purchase price of the property.
On the other hand, the real (net) yield is calculated by taking into account building management fees and taxes.
Although the gross yield may be good, the real yield may be lower than expected due to higher than expected management costs.
In order to avoid such a situation, please make sure you understand the two types of calculation methods before investing in real estate.

How to calculate gross yields

The following formula is used to calculate gross yields:

Gross yields ＝ （Annual rental income ÷ Property purchase price） ✕ 100
The gross yield can be calculated simply by dividing the annual rental income by the price of the property, a very simple calculation.

How to calculate real (net) yields

The real yield is calculated based on annual rental income minus property taxes, various management and repair costs, fire insurance premiums, vacancy loss costs, and other fees.
The real yield is a more accurate way to determine earning capacity.
The real yield is calculated by the following formula.

Real Yield ＝ ｛（Annual rental income － Annual costs） ÷ Property purchase price｝ ✕ 100
The real yield calculation method allows for a more realistic figure when comparing properties to each other.
However, it is difficult to accurately predict annual expenses, especially vacancy loss expenses.
In such cases, one approach is to consider only typical expenses without considering expenses that are difficult to predict, such as vacancy loss expenses.
For example, the main expenses for a condominium unit are the management fee, reserve fund fee for repairs, and rental property management fees.
It is relatively easy to calculate the real yield by considering only these expenses as a guide when selecting a property.

Market "yields" of real estate investments by city

Yield rates vary depending on the type of property and the region.
In order to determine the appropriate yield, it is important to know the market rate for each region and property type in which you invest.

Average real estate yields in Tokyo

Based on the "Real Estate Investor Survey" conducted in April 2021, we will look at expected yields and transaction yields for a single rental housing unit in Tokyo.
The market yields in Tokyo are around 4% for both studio and family units.

＜Single one room condo/apartment units＞

●Jonan District（Meguro and Setagaya wards）：Expected yield 4.2%、transaction yield 3.8%
●Joto District (Sumida and Koto wards)：Expected yield 4.4%、transaction yield 4.0%

■Conditions
Access to transportation：within 10 min walking distance to nearest station
Age of building：5 years or less
Average Floor Area：25～30㎡
Total number of units：around 50

＜Family type units＞

●Jonan District（Meguro and Setagaya wards）：Expected yield 4.3%、transaction yield 4.0%
●Joto District (Sumida and Koto wards)：Expected yield 4.5%、transaction yield 4.1%

■Conditions
Access to transportation：within 10 min walking distance to nearest station
Age of building：5 years or less
Average floor area ：50～80㎡
Total number of units ：around 50

＜Luxury Residences for Expats＞

●Low rise residences（Azabu, Akasaka,Aoyama in Minato ward）：Expected yields 4.5%、transaction yields 4.0%
●High rise/tower residences（Azabu, Akasaka,Aoyama in Minato ward）：Expected yields 4.5%、transaction yields 4.0%

■Conditions
Age of building or years since major renovation: less than 5 years
(Low-rise type)
Average dedicated area per unit: 100㎡ or more
Total number of units: about 20
(High-rise/tower type)
Average private floor space per unit: approx. 100㎡
Total number of units: 20 or more floors

Average real estate yields in regional cities

Next, we will look at the expected yields for a single rental housing unit of equivalent condition in regional cities other than Tokyo.
Based on the "Real Estate Investor Survey" conducted in April 2021, yields in regional cities are higher than those in Tokyo.
With the exception of Osaka and Yokohama, yields tend to be over 5%, about 1% higher than in Tokyo.
One reason is that the purchase price of properties is lower than in Tokyo.
Although it may seem that regional cities are better when considering yields alone, of course, regional areas have their own unique risks.

●Sapporo: 5.5% for studio, 5.5% for family
●Sendai: 5.5% for studio, 5.5% for family
●Saitama: 5.1% for studio, 5.2% for family
●Chiba: 5.1% for studio, 5.2% for family
●Yokohama: 4.8% for studio, 4.9% for family
●Nagoya: 5.0% for studio, 5.0% for family
●Kyoto: 5.2% for studio, 5.2% for family
●Osaka: 4.8% for studio, 4.9% for family
●Kobe: 5.1% for studio, 5.2% for family
●Hiroshima: 5.7% for studio, 5.8% for family
●Fukuoka: 5.0% for studio, 5.1% for family

In conclusion

We explained the types of yields, calculation methods, and market rates.
In real estate investment, yield is an important indicator, but it also has unstable aspects, such as the difficulty of taking vacancy risk into account.
Therefore, rather than relying solely on yield, it is advisable to determine whether or not tenants will continue to move in at the rent you have set.