REAL ESTATE YIELD IN THE USA: HOW TO DEFINE IT?

 REAL ESTATE YIELD IN THE USA: HOW TO DEFINE IT?

Buying real estate in the USA to rent out is an excellent way to build a significant amount of wealth. To ensure a quality investment, every homeowner should calculate their property's return on investment (ROI) before even committing to the transaction. In the real estate industry, ROI measurement is widely used to determine the performance of an investment or to compare the performance of several different investments.

Finding the right method for calculating real estate yield in the US can be difficult. Certain variables, such as the cash payment for the property or the mortgage, can be included or excluded from the basic calculations. In this article, Investir.US invites you to examine real estate yields in the US.

Simply calculate the real estate yield of a property in the USA

Some real estate investors, to know the real estate yield of a property, base themselves on a simple formula:

Real estate yield = (Profit from investment – Cost of investment) / Cost of investment

This method, although general and simple, can be based on estimates. Other methods used to determine the rate of return on a rental property in the US are primarily the capitalization rate and the cash yield. The choice of method varies depending on how the property is financed.

Calculation of the capitalization rate

When paying cash for their rental property, real estate investors use the capitalization rate. This is defined as the ratio of a property's net operating income to its purchase price. The formula for calculating this is as follows:

Capitalization rate = net operating income/purchase price at— 100

Calculation of the cash rate of return

More complicated to implement, the cash yield method allows investors to determine the return on investment for a US property when they take out a mortgage or a home loan to finance the property. The cash yield on a rental property investment is the ratio between the annual net income generated and the total amount of cash actually invested in the property. The calculation formula is as follows:

Cash rate of return: (annual cash flow/total cash invested) at— 100

What is a good rate of return on real estate in the USA?

To the question "What is a good return on real estate in the USA?", there is unfortunately no ready-made answer... Experts believe that to answer this question, one must take into account the size of the rental property, its location, the risk inherent in the investment, etc. As a general rule, a rate of return greater than or equal to 15% is acceptable.

Based on the capitalization rate, a 10% return is considered a fair return. It becomes a "good return" above 12%.

Return on investment is both an objective and subjective concept. For some, a 12% return is favorable, while others would not consider purchasing a rental property if its return on investment is not at least 20%.

The distinction between real estate yield in the USA and profits

Of course, before any return on investment can be realized in the form of actual profits, the property must be sold. Most of the time, a property doesn't sell at its market value. A real estate transaction may close below the seller's initial asking price, thus reducing the final calculation of the return on investment for that same property.

Selling a property also involves costs, such as money spent on repairs, painting, and landscaping. There are also advertising costs, appraisal fees, and the commission paid to the real estate agent or broker.

Advertising and commission fees can be negotiated in advance with the chosen service provider. Real estate developers with multiple properties for sale are well-positioned to negotiate favorable rates with media outlets and brokers. However, the return on investment of multiple sales, with variable costs for advertising, commissions, financing, and construction, presents complex accounting challenges that are best left to a professional.

Calculating real estate yield in the US can be simple or complex, depending on the calculation method used and the specific scenario. In a booming economy, real estate investment is a potentially very profitable operation. In a period of recession or uncertainty, as is currently the case with the health crisis, there are many good deals available to real estate investors. It is particularly when the economy recovers that they will reap the rewards of their investment.