Yield is the number people quote when they compare one property investment with another, and it is quoted almost exclusively in its least useful form.
Gross yield
Annual rent divided by purchase price or value, as a percentage.
A unit bought for KES 6,500,000 letting at KES 45,000 a month:
Annual rent: 45,000 × 12 = KES 540,000 Gross yield: 540,000 ÷ 6,500,000 = 8.3%
That number ignores every cost of owning the thing, which is why it is the one in the advertisement.
Net yield
Annual rent, less the costs of holding and running the property, divided by the total acquisition cost.
The same unit, honestly:
| Line | Amount | | --- | --- | | Annual rent at full occupancy | 540,000 | | Less: vacancy allowance, one month | (45,000) | | Less: management commission, 8% of collections | (39,600) | | Less: service charge not recovered | (36,000) | | Less: repairs and maintenance | (54,000) | | Less: insurance | (12,000) | | Less: land rates and land rent | (18,000) | | Net income | 335,400 |
And the denominator is not the price either:
| Line | Amount | | --- | --- | | Purchase price | 6,500,000 | | Stamp duty | 260,000 | | Legal fees and disbursements | 130,000 | | Land search, survey, valuation | 45,000 | | Fit-out before letting | 180,000 | | Total acquisition cost | 7,115,000 |
Net yield: 335,400 ÷ 7,115,000 = 4.7%
Same property. 8.3% in the listing, 4.7% in reality. Neither figure is dishonest. They measure different things, and only one of them is what the property does for you.
What the gap is made of
The difference is almost always the same four items, and they are the four most often left out:
- Vacancy. A unit does not let for twelve months of every year forever. One month a year is a modest assumption, not a pessimistic one.
- Acquisition costs. Stamp duty, legal fees and searches are part of what the asset cost you. See stamp duty.
- Non-recovered service charge. A vacant unit still attracts its levy, and the owner pays it.
- Maintenance. Not repairs that happened last year. A provision for the ones that will.
What yield does not tell you
Capital growth. A 4% yield with strong appreciation may beat a 9% yield in a market going nowhere. Yield measures income, not total return.
Risk. Yield is high where risk is high. A very high yield in a given market usually reflects something: short tenancies, difficult collection, weak demand, or an area where value is not expected to grow.
Financing. Yield is a property-level measure. It says nothing about what the property does for you after debt service, which is a different and often more relevant calculation.
What goes wrong
Gross is compared with net. Two properties, one quoted gross and one net, are not comparable, and the gross one always wins. Insist on the same basis.
Occupancy is assumed at 100%. See vacancy rate.
Yield is calculated on price rather than on all-in cost. Understating the denominator overstates the result, every time.