【A Must-Read for Foreign Real Estate Investors】Understanding Gross and Net Yield When Investing in Japanese Real Estate

With the yen’s depreciation, many investors are considering investing in Japanese real estate, which has gained significant popularity.

Japan offers relatively low country risk and imposes no restrictions on foreign investors, making it an attractive entry point for foreign real estate investment.

However, not all Japanese properties are a good investment. It’s essential to carefully compare factors such as yields when making an investment decision.

In this article, we will explain the features and calculation methods of gross and net yield, which are crucial to know when investing in Japanese real estate.

Types of Yield in Japanese Real Estate Investment

Yield, an essential indicator in real estate investment, shows the annual return relative to the investment amount. Higher yields indicate more efficient returns.

However, yield can generally be divided into two main types, and it’s crucial to understand their differences:

• Gross Yield
• Net Yield

Gross Yield

Gross yield, also known as the Gross Rate of Return, is an indicator of the ratio of rent income to the property price (investment amount). It is also referred to as the rough yield, gross yield, or simple yield.

Since it can be calculated simply with the property’s price and rental income, it is often used to gauge general profitability.

The yields listed in Japanese real estate advertisements or websites are usually gross yields. However, because gross yield does not account for expenses, it may significantly differ from actual profitability.

Therefore, when considering yield, it is essential to also check the net yield, which we will introduce next.

Net Yield

Net yield, also known as the Actual Rate of Return, takes expenses into account when calculating yield. It is also referred to as net yield or NOI yield.

Since net yield is calculated by subtracting expenses from rental income, it provides a more accurate representation of the actual yield.

It is not uncommon for properties with high gross yields to have low net yields. When evaluating properties, it’s crucial to consider not just the gross yield but also simulate the net yield for a thorough assessment.

Wagaya Japan offers multilingual support for foreign investors interested in buying and selling real estate in Japan. Please feel free to contact us.

Characteristics and Calculation of Gross Yield

Gross yield is simple to calculate and is useful for gauging general profitability.

Gross Yield in Advertisements

As previously mentioned, the yield figures displayed in Japanese real estate flyers and websites are generally gross yields. In some cases, they may also represent the expected yield.

Gross yield is suitable for simple property comparisons, but it only represents a superficial yield as it does not include costs like expenses. Be cautious when considering properties solely based on high gross yields in advertisements.

How to Calculate Gross Yield

Gross yield can be calculated using the following formula:

Gross Yield (%) = Annual Rent Income ÷ Property Price × 100

For example, if the annual rent income is 5 million yen and the property price is 40 million yen, the gross yield would be:

Gross Yield = 5 million yen ÷ 40 million yen × 100 = 12.5%

Difference Between Expected Yield and Gross Yield

Expected yield assumes the property is fully occupied and calculates the yield based on this assumption. It helps gauge the maximum potential income of the property.

In contrast, gross yield generally considers the current vacancy situation, providing an immediate post-investment yield.

Let’s calculate the expected yield and gross yield under the following conditions:

• Units: 10
• Rent: 80,000 yen/month
• Occupancy rate: 80%
• Property price: 50 million yen

The annual rent income at full occupancy is:

10 units × 80,000 yen × 12 months = 9.6 million yen

Thus, the expected yield is:

Expected Yield = 9.6 million yen ÷ 50 million yen × 100 = 19.2%

Considering the actual occupancy rate of 80%, the annual income is:

9.6 million yen × 80% = 7.68 million yen

Thus, the gross yield is:

Gross Yield = 7.68 million yen ÷ 50 million yen × 100 = 15.36%

This illustrates that gross yield and expected yield can differ significantly. Ensure you check whether the yield in advertisements is the expected yield or gross yield. Also, confirm what rent level is used as the base for calculating the expected yield, as it may be based on the highest rent in the property.

Wagaya Japan offers multilingual support for foreign investors interested in buying and selling real estate in Japan. Please feel free to contact us.

Characteristics and Calculation of Net Yield

Even if a property has a high gross yield, it may not yield efficient returns if the net yield is low. When deciding whether to invest, it is crucial to simulate the net yield as well.

Calculating Net Yield Yourself

Gross yield is calculated using fixed figures like annual income and property price, so the result will be the same regardless of who calculates it. Therefore, it can also be calculated from real estate company flyers.

On the other hand, net yield varies depending on who calculates it, as it takes expenses into account. Typical expenses considered when calculating net yield include:

• Management fees
• Repair fund contributions
• Insurance premiums
• Maintenance costs
• Restoration costs
• Advertising costs
• Fees for outsourced management
• Property taxes

Also, the property price includes incidental costs such as agent fees at the time of purchase. Since net yield calculations involve predicting costs that can vary depending on the investor’s decisions, the results may differ.

There is no clear definition or rule for expenses included in net yield calculations, and costs are not fixed at the time of calculation but estimated. Therefore, it is not possible to present exact net yields on real estate company flyers.

You must estimate realistic expenses and calculate the net yield yourself.

How to Calculate Net Yield

Net yield can be calculated using the following formula:

Net Yield (%) = (Annual Rent Income – Annual Expenses) ÷ (Property Price + Purchase Costs) × 100

Purchase costs may include stamp duties, agent fees, real estate acquisition taxes, and registration fees. These costs are somewhat predictable, so consult with a real estate company. It is important to specifically estimate and calculate potential annual expenses.

To simplify complex calculations, start with an estimate using 30% of the rent income and then refine the calculation as you narrow down your property choices.

Importance of Net Yield When Considering Investment Properties

For example, let’s calculate the gross, expected, and net yields under the following conditions:

• Property price: 50 million yen
• Purchase costs: 4 million yen
• Units: 10
• Rent: 120,000 yen/month
• Occupancy rate: 85%
• Annual expenses: 10 million yen

Full occupancy rent income is:

10 units × 120,000 yen × 12 months = 14.4 million yen

The actual rent income, considering the occupancy rate, is:

14.4 million yen × 85% = 12.24 million yen

Thus, the expected and gross yields are:

Expected Yield = 14.4 million yen ÷ 50 million yen × 100 = 28.8%

Gross Yield = 12.24 million yen ÷ 50 million yen × 100 = 24.5%

Net yield is:

Net Yield = (12.24 million yen – 10 million yen) ÷ (50 million yen + 4 million yen) × 100 = 4.15%

As shown, the different types of yields can yield vastly different results. While searching for properties, consider gross and expected yields, but use net yield for more detailed comparisons.

Conclusion

In this article, we have explained the different types of yield, their characteristics, and how to calculate them. Yield is a crucial factor in selecting investment properties, and the type of yield can significantly alter the numbers.

Even if a property has a high gross yield, a low net yield can mean an inefficient investment. Note that most yields in Japanese real estate flyers or websites represent gross or expected yields.

Ultimately, it is crucial to simulate net yields before making an investment decision.

Wagaya Japan offers multilingual support for foreign investors interested in buying and selling real estate in Japan. Please feel free to contact us.