At a glance
- Gross initial yield = annual rent / purchase price excluding buyer's costs. Net initial yield takes operating costs and buyer's costs into account.
- A high gross initial yield often means higher risk: a shorter lease term, a weaker tenant or a less desirable location.
- Assess the remaining lease term (WALT) and the potential to re-let if the tenant leaves.
- Box 3 or corporation tax: the structure determines your net return.
Gross initial yield and net initial yield explained
Gross initial yield is the gross annual rent divided by the purchase price excluding buyer's costs. Net initial yield deducts ownership costs such as maintenance, insurance, management and municipal property tax (OZB) from the rent and divides this by the purchase price inclusive of acquisition costs. For a fair comparison, always look at the net initial yield.
Worked example
An industrial unit with an annual rent of €72,000 is offered for €1,000,000 excluding buyer's costs. The gross initial yield is 7.2%. With €10,000 in ownership costs and just over €110,000 in buyer's costs, the net initial yield comes to around 5.6%.
Assessing risks
- Tenant: financial health, sector and dependence on a single tenant.
- Lease term: how much longer is the rent secured, and when can the tenant terminate the lease?
- Location: supply and demand and vacancy levels on the business park.
- Property: state of repair, energy label and future investment in sustainability improvements.
- Market rent: is the current rent above or below market level? This determines the risk when re-letting.
The role of the commercial real estate agent
An investment real estate agent compares the rent with market levels, assesses the leases and has access to off-market properties. When selling, they reach the right network of investors, which often makes a difference to the proceeds from investment property.
Frequently asked questions
What is a good return on a commercial property?
That depends on the sector and location. Logistics properties in prime locations have lower gross initial yields than smaller units or shops in areas leading to the main shopping streets. Look at the risk per euro of return, not just the percentage.
Can I finance an investment property?
Yes, but banks generally finance investment property up to 50%–70% and assess interest coverage from rental income.