Evaluating Property Performance: Understanding Yield and ROI

Buying a property is only the beginning. The real question is whether it’s delivering financial value. Investors and homeowners alike must ask:
“Is my property truly a smart investment?”

To answer that, two key financial benchmarks matter: Yield and Return on Investment (ROI).

Yield measures what percentage of your property’s value is returned to you annually as rental income, offering a clear and direct way to assess earning potential.

ROI, however, goes a step further. It calculates your net profit after subtracting all expenses and taxes. In doing so, ROI reveals a much clearer picture of the actual return on your investment.

Yield is income. ROI is profit.
And knowing the difference can define whether your investment is merely stable or truly growing.



▫Why Yield Matters

Let’s break it down with an example.

If your property is worth Rs. 10 million, and you receive a monthly rent of Rs. 50,000
that’s Rs. 600,000 annually
then the yield of this property is 6%.
This means that on an investment of Rs. 10 million, you are earning a 6% annual return.

However, if your property is worth Rs. 20 million, but the rental income remains the same — Rs. 600,000 annually — then the yield drops to 3%.
In other words, your return is now only 3% on a higher investment.

▫To calculate Yield:

Yield (%) = (Annual Rent ÷ Property Value) × 100

So in both cases:
• Rs. 600,000 ÷ Rs. 10,000,000 × 100 = 6%
• Rs. 600,000 ÷ Rs. 20,000,000 × 100 = 3%

This simple formula allows you to compare properties and investment opportunities across the market.

Yet, many people make a common mistake: they divide the property’s price by the rent, which reverses the logic.
Always remember, yield must be calculated by dividing the annual rent by the property’s value, not the other way around.

Yield is always expressed as a percentage, not in rupee terms.
If the annual rent from a property is Rs. 600,000 and the property’s value is Rs. 10 million, then the yield is 6%.

Understanding this distinction is crucial. Yield reflects a property’s income potential relative to its value. Using the wrong formula can result in a false sense of profitability and bad investment decisions.



▫What ROI Really Tells You

Now let’s turn to ROI — Return on Investment.

To calculate ROI, you first estimate all annual expenses and taxes related to the property. Once you have that figure, subtract it from the property’s annual yield (gross income). The result is your net profit.

Example:
• Annual Rental Income (Yield): Rs. 600,000
• Annual Expenses (taxes, maintenance, security): Rs. 200,000

ROI = Rs. 600,000 – Rs. 200,000 = Rs. 400,000

That Rs. 400,000 is your ROI, the clean, legal profit you earn on a property worth Rs. 10 million (1 crore).

To express this as a percentage:

ROI (%) = (Net Profit ÷ Property Value) × 100
= (Rs. 400,000 ÷ Rs. 10,000,000) × 100 = 4%

So, you are earning a 4% net return per year, after all deductions, on your one crore investment.



▫The Smart Investor’s Lens

Always remember:

• Yield represents the gross return, the ratio of annual rental income to the property’s market value.
• ROI represents the net return, the profit left after accounting for all expenses and taxes.

So instead of asking,

“How much rent do I earn annually?”
A better question is:
“What is my property’s yield and more importantly, what is its ROI?”

In volatile markets, where property values fluctuate, and expenses quickly erode returns,evaluating both yield and ROI is not just smart; it’s essential.



This article is part of a dedicated series on property investment awareness, published by SyedShayan.com to help investors make informed, data-driven decisions in Pakistan’s evolving real estate landscape.