Yield is the return on an investment or the amount of profit, stated as a percentage of the amount invested. Also known as the rate of return. Yields can be depicted in a variety of ways including levered and unlevered and before tax and after tax. As example calculations, assume an investment property is acquired for $1,000,000 using $200,000 of equity and $800,000 of debt carrying a 5.0% interest-only rate. If the property generates net operating income (NOI) of $80,000, then the unlevered yield is 8.0% ($80,000 NOI divided by $1,000,000 purchase price), and the levered yield is 20.0% ($80,000 NOI less $40,000 interest payment equals $40,000 divided by $200,000 of equity).
Assuming the investor has a marginal tax rate of 30.0%, then the after-tax unlevered yield would be 5.6% ($80,000 NOI less $24,000 in income tax ($80,000 times 30.0%) equals $56,000 divided by $1,000,000 purchase price).
Following this example, assuming the property generates $30,000 per year in depreciation allowances, then the property would produce an after-tax levered yield of 18.5% ($80,000 NOI less $40,000 of interest deductions less $30,000 of depreciation allowance equals $10,000 of taxable income times 30.0% marginal tax rate equals $3,000 tax liability.