What Is Yield?
Yield = Annual Income ÷ Investment Cost × 100. For real estate, "income" can mean NOI (property-level), cash flow (after debt), or dividends (REITs). "Cost" can mean purchase price (giving you something like cap rate) or cash invested (giving you cash-on-cash return). A $300,000 property with $21,000 NOI has a 7% yield on price—same as cap rate. With 75% LTV and $6,000 cash flow, yield on cash = 8% ($6,000 ÷ $75,000). Yield is the umbrella term; cap rate and cash-on-cash return are specific applications.
Yield is the annual income from an investment expressed as a percentage of the amount you invested—how much the asset pays you each year relative to what you put in.
At a Glance
- What it is: Annual income ÷ investment cost, expressed as %
- Why it matters: Standardized way to compare returns across assets
- Real estate forms: Cap rate (NOI ÷ price), cash-on-cash return (cash flow ÷ cash invested)
- Limitation: Ignores appreciation, principal paydown, and total return
Yield = Annual Income / Investment Cost × 100
How It Works
Yield on price (cap rate). When "income" = NOI and "cost" = purchase price, yield = cap rate. A $400,000 property with $28,000 NOI = 7% yield. This measures property-level return before financing. All-cash buyers care most about this—it's their actual yield.
Yield on cash (cash-on-cash). When "income" = cash flow and "cost" = cash invested (down payment + closing costs), yield = cash-on-cash return. Leveraged investors care about this—it's what hits their bank account. A $75,000 investment with $6,000/year cash flow = 8% yield on cash.
Yield vs. total return. Yield captures income only. Total return adds appreciation and principal paydown. A 5% yield property with 3% annual appreciation and 1% principal paydown has ~9% total return. Yield understates the full picture for buy-and-hold—but for income-focused investors, yield is the headline number.
Real-World Example
Memphis duplex. Purchase $220,000, down $55,000, closing costs $5,500. Cash invested: $60,500. NOI $19,800. Debt service $13,200. Cash flow $6,600/year. Yield on price (cap rate) = $19,800 ÷ $220,000 = 9%. Yield on cash (CoC) = $6,600 ÷ $60,500 = 10.9%. The cap rate tells you the property earns 9% before financing. The cash-on-cash return tells you your $60,500 earns 10.9%—leverage amplifies yield on cash when NOI exceeds debt service.
Pros & Cons
- Simple—one number, easy to compare
- Universal—works for stocks, bonds, REITs, direct real estate
- Income-focused—measures what you get each year, not just paper gains
- Complements cap rate and cash-on-cash return—same family of metrics
- Ignores appreciation—a 4% yield property with 6% appreciation may beat a 7% yield with 0% appreciation
- Ignores principal paydown—debt service builds equity you don't "see" as income
- Snapshot—doesn't capture yield trajectory (rent growth, expense creep)
- Definition varies—always specify: yield on price or yield on cash?
Watch Out
- Comparing apples to oranges: Cap rate (yield on price) vs. cash-on-cash return (yield on cash) are different. A 6% cap with 80% LTV can produce 12% CoC—don't conflate them.
- Pro forma yield: Seller's "8% yield" may use inflated NOI. Recast with your own vacancy rate and operating expenses.
- REIT yield traps: High-yield REITs (10%+) often signal distress. Risk-adjusted return matters—a 5% yield from a stable REIT may beat a 12% yield from one cutting dividends.
- Ignoring total return: For long hold periods, total return (yield + appreciation + principal) matters more than yield alone.
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The Takeaway
Yield = annual income ÷ investment cost. For real estate, it shows up as cap rate (NOI ÷ price) or cash-on-cash return (cash flow ÷ cash invested). Use yield to compare income across deals—but remember it ignores appreciation and principal paydown. For buy-and-hold, total return is the full picture; yield is the income slice.