A Practical Guide to Commercial Property Yield
When you look at commercial real estate as an investment, one of the most important figures to understand is rental yield.
Rental yield measures the income return you get from a property, expressed as a percentage of its purchase price. It helps you compare different investment opportunities and understand whether a property is likely to produce positive cash flow or not.
Different from overall return on investment (ROI), which is calculated after the fact and includes capital gains, yield focuses on future income performance.
Types of Commercial Property Yield
- Gross Rental Yield
Gross yield provides a high-level view of income before any expenses are deducted. It’s often used as a quick comparison tool when reviewing multiple opportunities.
How to calculate gross yield:
- Determine the annual rental income
- Divide this by the purchase price
- Multiply by 100 to express it as a percentage
Example:
- Annual rent: $100,000
- Purchase price: $2,500,000
Gross yield = ($100,000 ÷ $2,500,000) × 100 = 4.0%
While useful, gross yield does not reflect the true cost of owning and operating a commercial property.
- Net Rental Yield
Net yield offers a more accurate picture by accounting for the expenses associated with owning the asset.
Common property costs included in net yield calculations:
- Council rates and land tax
- Insurance
- Management fees
- Maintenance and repairs
- Vacancy allowances
- Any outgoings not recoverable from tenants
- Transaction costs (if assessing total investment cost)
How to calculate net yield:
- Subtract annual property expenses from gross rental income
- Divide the net income by the purchase price (or total investment cost)
- Multiply by 100
Net yield is often the preferred measure for property investors focused on cash flow and long-term income sustainability.
What Drives Yield in Commercial Property?
Yields are shaped by a combination of asset-specific market factors, including:
- Location and surrounding amenity
- Lease length and structure
- Tenant quality and contract
- Building age and condition
- Broader economic influences and interest rates
High-quality assets with long leases and strong tenants typically have lower yields and carry less risk. Properties with higher yields often have an increased risk or require more hands-on management, such as leasing, upgrades or repositioning.
Why Yield Matters
Yield plays a key role in assessing:
- Income reliability
- Risk exposure
- Debt servicing capacity
- Relative value across opportunities
However, experienced property investors know yield should never be viewed in isolation. Lease security, vacancy risk, capital expenditure and long-term market conditions are equally important in determining overall performance.
A Measured Approach to Commercial Investment
At Commercial Collective, we view yield as a starting point. A well-considered commercial property strategy balances income performance with asset quality, tenant security and long-term factors. Understanding how yield works, allows property investors to make decisions that are aligned with both current conditions and future objectives.
