The single thing almost all investors have in common is the desire to know the answer to the question “How much will I make on my investment?“. Put another way, investors want to know what the return on their invested dollars will be, or what their return on investment will be (ROI). The ROI performance measurement or Yield, as it is sometimes referred to, can be applied to measure the effectiveness of all types of assets and is especially useful in real estate. The ROI measurement captures the relationship between Net Operating Income and Invested Capital, Cash Flow and Invested Capital and the Asset’s Total Return versus Invested Capital.

The first of these “ROI” measurements is Net Income ROI, or the relationship of the Net Operating Income (NOI) versus your Invested Capital. This is helpful to investors who focus primarily on the traditional income statement. Net Operating Income is derived by subtracting all items classified as expense from gross revenues. NOI is calculated both before and after taxes. I posted a PDF Form that should help to calculate your NOI. You can download it again here.

Important Note: When applying an expense item to Mortgage, it is important to remember that the interest portion of that payment should be applied and not the principal portion. The principal portion is treated as a balance sheet item and has no effect on the income statement.

The formula for NOI Yield is;

gross income – operating expense – interest cost – depreciation – taxes
= ———————————————————————————–
owner’s equity (invested capital)

Example:

• Property: 400 Square Meter Office Condo in Makati
• Acquisition Cost or Invested Capital is: Php 20.5 Million
• (Please do not include VAT since that is creditable)
• Gross Income from Rent: Php 3.0 Million Annually
• Operating Expense: Php 106,000.00
• Corporate Income Tax 35%: Php 1.0 Million

Using the formula and assumptions above, we calculate our NOI Yield as follows;

3.0 Million – 106,000 – 1.0 Million
= ——————————————
20.5 Million

Net Operating Income Yield = 9.2%

The complete excel worksheet is attached and can be downloaded here. Feel free to use and revise as necessary.

So what does a 9.2% yield mean to you? As we discussed during the last issue, Performance Measurement is RELATIVE. Compared to other investment instruments 9.2% may not seem that attractive but once you consider the level of risk, the proposition takes on new meaning. Furthermore, if you compare the same return to instruments of its kind, a 9.2% yield for an Office Condo in Makati is something you will not want to miss.