Commercial Property Rental Yield and Risk Guide
Assess commercial property yield through tenant quality, vacancy, use flexibility, maintenance needs and exit liquidity.
Calculate net rather than gross yield
Deduct vacancy, maintenance, tax, insurance, dues, management and reletting costs from annual rent to create a comparable net return.
Do not assess the tenant separately from the lease
Term, escalation clauses, security structure and the sustainability of the tenant’s business directly affect income quality.
Dependence on one use is a risk
Property suited only to a highly specific operator may require significant conversion before reletting. Test alternative uses in advance.
Consider liquidity and capital needs together
A high-yielding property may have a narrow buyer pool or major future maintenance costs. Include exit time and additional capital requirements in the model.
Quick answers
- Why is gross yield insufficient? — Vacancy, maintenance, tax, insurance, dues and reletting costs can change the net result.
- What risk comes with a single-use property? — It can raise conversion cost and time for a future tenant or buyer, so alternative uses should be tested first.