Investment
The measures a deal is judged by: yield, cap rate, cash-on-cash, leverage, cashflow and vacancy.
Gross yield
Annual rent divided by purchase price. The figure listings quote, and the less informative of the two.
It ignores tax, municipal tax, building fees, insurance, vacancy and maintenance. Useful to screen quickly, not to decide.
The gap to the net figure is typically two to three points. Enough to turn an apparently good deal into a mediocre real one.
Net yield
Annual rent after tax and all costs, over the capital invested. The comparable number.
It deducts income tax at the lease's rate, municipal tax, building fees, insurance, vacancy and maintenance, and does not deduct mortgage interest or principal, which are not deductible.
It is the only figure comparable with a financial investment, because it is the only one that has already paid what it owes.
Yield
Without a stated basis, an advertised yield is almost always the gross one.
In listings and investment decks, yield defaults to gross rent over purchase price, before transaction costs.
Always ask the basis: over price or over capital invested, before or after tax. Without it, two yields are not comparable.
Cap rate
Net operating income over property value. A valuation metric, not a measure of personal return.
It excludes financing and the investor's own income tax, which makes it comparable between properties but not between investors.
It is the appraiser's metric. For a buyer using a mortgage, the number that matters is cash-on-cash.
Cash-on-cash return
Annual cashflow over the equity actually put in. The measure for a buyer using credit.
The denominator is the money that left your pocket: deposit, transfer tax, stamp duty, deed and initial works. Not the property price.
With leverage, a high cash-on-cash can sit beside a modest yield on the property's value, and with much greater risk.
Leverage
Using credit to buy more than equity alone would allow. It multiplies return and risk in equal measure.
While the property's return exceeds the cost of credit, leverage raises the return on equity. When it does not, it amplifies the loss.
The practical limit is not arithmetic, it is cashflow: a vacant month with an instalment due comes out of your pocket, and that is where leveraged portfolios break.
Cashflow
What is left each month after everything: rent less instalment, taxes, building fees, insurance, vacancy and maintenance.
It determines whether a property carries itself. Negative cashflow is not necessarily bad (it can be capital accumulation) but it has to be funded every month.
The break-even rent is the rent at which cashflow is zero. Worth knowing before buying.
Vacancy
The share of the year with no tenant. Assuming zero is the commonest mistake in investment arithmetic.
A conservative figure for long lets in an area with demand is 6%. About three weeks a year, covering a change of tenant every two or three years.
In high-turnover areas and in short-term letting, real vacancy is far higher and seasonal.
The other groups
General information based on current legislation. Not tax or legal advice.