What is it?
Yield (also known as Cash on Cash Return) is a popular commercial real estate return metric. It measures the cash paid to investors on invested capital in a given time period.
Is it similar to a dividend yield on a stock?
Yes, like a stock dividend yield, a property’s cash on cash return is calculated by dividing the cash paid to an investor by the investor’s total investment in the property.
Why do people go crazy over “cash on cash” return?
When people talk about “passive income” in real estate, they typically refer to the income produced by a property’s cash on cash return. The fervor for passive income has been increasing in the United States, evidenced by the sharp increase in “hobbyist” investors and new sponsors in the commercial real estate market.
What does “chasing yield” refer to?
“Chasing yield” is a commonly used phrase that describes investment in properties with a high cash on cash return without regard for the investment’s risk. When investors chase yield, the price of risky assets increase, reducing their yield.
Is “yield” the most important return metric?
It depends on your investment goals. If you’re most interested in the cash flow created by an investment, yield is metric to which you should pay most attention. If you’re interested in capital appreciation, you’re better to consider IRR or equity multiple.
Yield, equity multiple, and IRR are all return metrics. Risk metrics should also be considered when reviewing a real estate investment. Common risk metrics include debt service coverage ratio and loan to value.