Yield 2015-11-11 08:00:00

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.  