Yield vs ROI: What's the Difference? Explained in 5 Minutes!

Yield vs ROI: What’s the Difference? Explained Simply!

🐮AG: Hey Ex, when investing in real estate, some people say you should calculate how much Yield (%) you get if you're renting out a property. Others say if you’re running a business, you should focus on ROI (%). So, what’s the difference between Yield and ROI? 🥹

🐻Ex: You have the internet to type questions but don’t actually use Google, huh? 🤨

🐮AG: Well… I read about it, but I don’t quite get it. But when you explain things, I somehow understand. 😅

🐻Ex: Ugh… my burden again, huh? Fine, let me break it down for you. 🙄

Yield and ROI
Both are financial metrics used to measure investment returns, but they differ in how they are calculated and applied.

Let's start with Yield

What is Yield?

Yield is the return on an investment in terms of cash flow, such as rental income, interest, or dividends, compared to the investment cost.

There are several types of Yield:

1. Gross Rental Yield

This is the basic rental return percentage before expenses.
It refers to buying a property and renting it out immediately without any additional investments like renovations, furniture, or added amenities.

This type of investment is ideal for those with "cold cash" (ready money) to purchase the property without taking a loan.

2. Net Rental Yield

This is the net return after deducting expenses, such as maintenance fees, agent commissions, and other costs.

It is suitable for investors who buy a property to generate rental income but still need to pay ongoing expenses.

3. Cash on Cash Rental Yield

This measures rental return based on actual cash investment.
It is ideal for investors who finance their property purchase through loans and expect the rental income to exceed the monthly loan payments.

So, you receive a 6% annual return from renting out your condo.

For Net Rental Yield, you need to deduct expenses like a 1-month maintenance fee and a 1-month agent commission (if applicable).
This means you only receive rental income for 10 months instead of 12.

So, after deducting all expenses, the net return is 5% per year.

What is ROI (Return on Investment)?

ROI measures the total return on investment, including profits or losses from asset appreciation. It helps assess the overall profitability of an investment.

This means you made a 50% return by buying the condo for 10M and selling it for 15M.

Key Differences Between Yield and ROI

Both Yield and ROI measure returns, but they serve different purposes.

✅ Yield is best for measuring annual returns, such as rental income or dividends.
✅ ROI is best for evaluating the overall profitability of an investment, considering both gains and losses.

Now do you get it? 😆
If you want to measure rental income, use Yield.
If you want to measure total investment profitability, use ROI! 🚀

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