“A 4% yield” is the most common phrase in real estate conversations. It’s also usually calculated incorrectly.
No intent to deceive. People simply save themselves complicated calculations. The problem is that the number coming out of the simple calculation is sometimes half of reality.
Gross Yield vs. Net Yield
Gross yield: monthly rent times 12 divided by property price. If rent is 4,500 NIS per month and the property price is one million NIS, that comes to 5.4%.
Net yield: after deducting property tax during vacancy periods, building maintenance, insurance, average annual maintenance, rental vacancy based on market average, and tax on rental income above the exemption. On the same property, net can be 2.8% to 3.2%. Half the gross number.
Return on Equity – The Metric That Matters Most
When using leverage (a mortgage), the relevant metric isn’t rental yield on the property price but return on equity (ROE) – the yield on the money you actually invested.
Example: a property at 1.2 million NIS. Equity 600,000 (50%). Net annual rent 30,000 NIS. Yield on property price: 2.5%. Return on equity, before financing cost: 5%. If annual appreciation runs at 3%, total return on equity is 8%. That’s the number to compare against alternative investments.
What Happens When You Add the Mortgage
When there’s a mortgage, you need to calculate cash flow. What’s left in your pocket each month after all expenses including mortgage repayment? A property with negative cash flow – one you pay for out of pocket each month – isn’t necessarily a bad deal. But that’s something to decide on consciously, not discover by surprise.
Three Metrics Worth Knowing
Cap Rate (capitalization rate): net operating income divided by property price. A cap rate below 3% in Israel today should make you stop and ask why. Cash- on- Cash return: net annual cash flow divided by equity invested – is your money working in the positive? IRR (internal rate of return): weights all cash flows over the life of the investment including sale. This is the most accurate metric for comparing different deals.
In Summary
Yield isn’t a single number. It depends on what you calculate, on what basis, and how you treat financing. Analysis done correctly can show that a property that looks less impressive on paper is actually a better deal than a property sold with a high gross number.
At Almi we don’t sell yields. We build an economic model for every deal and show the client the real numbers before they decide.