You Asked Us – What is the Difference Between “Net pre-tax Yield” and “Gross Yield”?

Japan Real Estate

Japan Properties

20 July, 2017 –

Yield is a key factor in real estate investing, expressing rental revenue as a proportion of a property’s purchase price. As prices rise, yield falls. But depending on the types of costs included in the calculation, yield can vary. Here are some differences to watch for:

Yield, Net Pre-Tax

For an accurate picture of the return you can expect on your investment, our preference is yield as net pre-tax, which includes all known costs and calculated before taxes. This is what we show on our deal analyzer spreadsheets which breaks down the numbers in terms of price, costs, return, etc. so that you can see how the property’s monthly cash flow is obtained. Net pre-tax yield includes all known purchase and running costs such as the realtor fee, proxy fees, property management, purchase tax, insurance, and monthly building fees. We cannot provide numbers we don’t have, of course. Therefore, we exclude annual taxes (property tax and income/corporate tax) and unknowns such as vacancies, maintenance/repairs or capital appreciation/depreciation. But, we do give you an indication of what you can expect.

Gross Yield / Coupon Yield

On some realtor listings you will find gross or coupon yield. Keep in mind that while the higher yield sounds attractive, you may want to ask about purchase costs and management fees not included in the yield. These fees can surprise you with 15% to 20% on top of the purchase price.

Fukuoka’s Lower Yields

As I mentioned, as prices rise, yield falls. Such is the case for the growing city of Fukuoka, located on the northern shore of the Japanese island of Kyushu. In Japan, property prices increased ever since the March 2011 earthquake and tsunami disaster off the Pacific coast of Tohoku and the subsequent nuclear spill at Fukushima. As a result of the disasters, families and businesses sought to distance themselves from Tokyo and moved to Japan’s western coast in Fukuoka.

Because of its location, Fukuoka is also considered the gateway to South East Asia, particularly for visitors from South Korea and China, being closer to Korea, Shanghai and Taiwan that it is to Tokyo.

This tier one location is a preferred choice for investors for its minimal cash flow risk, since properties are easily tenanted. Here you can find rental yield between 6% to 8% net pre-tax.

Sapporo’s Higher Yields

Sapporo is the largest city on the northern Japanese island of Hokkaido. Mainly a white-collar community with academic facilities being its main economy driver, aside from tourism. After the 3-11 disaster, property prices took a serious hit in the city after a decline in tourism for most of 2011-2013. Even though tourists returned and real estate has since picked up, property prices remain depressed, while rental rates, which are affected more by long term residents, stayed the same. As a result, stable rent plus declining property prices continue to generate higher yield.

Hokkaido is one of the world’s most renowned winter sports resort locations attracting millions of Japanese and international tourists every year. Due to its slopes and winter snow festivities tourism is not likely to taper down. We are seeing approximately 7% to 10% on average, net pre-tax.

(Source – Priti Donnelly, Nippon Tradings International”, Pic – Fukuoka Tower / “Warren Antiola)”

This entry was posted in Japan Real Estate and tagged , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.