Target Yield Purchase Price Calculator

When you look at an income property such as a warehouse or retail unit, the lease terms are already fixed by the listing and the target yield is fixed by you. The one unknown is how much you can afford to pay. An ordinary yield calculator takes a price and returns a yield, so finding the ceiling price means running it again and again with different prices. This calculator solves the equation backwards: enter the floor area, monthly rent per pyeong, vacancy rate, operating expense ratio and target yield, and it returns the maximum purchase price at which that yield is achieved, together with the price per pyeong.

There are two answers depending on what the target is measured against. If the target is a cap rate, it is the yield the property itself produces regardless of financing, and the ceiling price is a single figure. If the target is a cash-on-cash return, it measures the return on your own money, so the loan-to-value ratio, the interest rate and the acquisition cost ratio all move the ceiling. The two answers can differ a great deal for the same lease, which is why the calculator asks you to choose the basis.

Buyers testing whether an asking price is reasonable. Put in the rent and area from the lease, the current vacancy and the running costs, set the yield you want, and you get the line above which the target cannot be met. If the asking price is above that line, negotiate or walk away. Sellers and agents use it the other way round, working back from a likely buyer's target yield to a sensible asking price.

When buying with a loan, the cash-on-cash basis is closer to what you will actually experience. If the interest rate is below the cap rate, more leverage raises the return on your own money and you can pay more and still hit the target; if the rate is above the cap rate, the opposite holds. It is a quick way to see how the ceiling on the same property moves as rates rise or fall.

This calculator rests not on legislation but on the definitions of yield. The definitions are the same ones used in the warehouse yield calculator, simply rearranged algebraically. The steps are these. Floor area times monthly rent per pyeong times 12 gives the potential gross income, the annual rent assuming no vacancy. Deducting the vacancy rate gives the effective gross income, and deducting operating expenses, the effective gross income times the expense ratio, gives net operating income (NOI). Operating expenses are the costs the landlord bears: management fees, insurance, repairs and the like.

A cap rate is NOI divided by price, so once the target cap rate is set, the maximum price is NOI divided by that rate. Cash-on-cash return is NOI less annual interest (price × LTV × rate) divided by your own money (price × (1 − LTV + acquisition cost ratio)). Solving for price, the maximum price is NOI divided by "target × (1 − LTV + cost ratio) + LTV × rate". If NOI is zero or negative, the target is zero, or the loan terms are incompatible with the target, there is no solution, and the calculator says so rather than printing zero or infinity.

The calculator's default is a 1,000-pyeong ambient warehouse at ₩36,100 per pyeong per month, 5% vacancy, a 20% expense ratio and a 6% target. Potential gross income is 1,000 × ₩36,100 × 12, or ₩433,200,000; after 5% vacancy the effective gross income is ₩411,540,000; and after operating expenses of 20%, ₩82,308,000, the NOI is ₩329,232,000. With a 6% cap rate as the target, the maximum price is NOI divided by 0.06, or ₩5,487,200,000, about ₩5.49 billion, which is ₩5,487,200 per pyeong.

Keep the same lease but switch the target to a 6% cash-on-cash return with 60% LTV, a 4.74% interest rate and a 4.6% acquisition cost ratio, and the maximum price rises to ₩5,964,347,826, about ₩5.96 billion. Because the interest rate is below the cap rate, borrowing lifts the return on your own money. Enter an interest rate above the target yield instead and you will see the ceiling fall below the cap-rate figure.

The most common mistake is setting vacancy to zero. Even a fully let building has gaps between tenants, so use the market average or the property's own record over recent years to keep the ceiling realistic. The next is leaving out operating expenses. Not all the rent is kept: management fees, insurance, repairs and property tax go out, and an expense ratio of zero inflates the ceiling.

On the cash-on-cash basis, people often forget acquisition costs. Acquisition tax, agent's fees and registration costs come out of your own money and belong in the denominator; leave them out and the ceiling comes out too high. The calculator is also pre-tax and ignores principal repayment, depreciation and any gain on resale. A ceiling that rises with leverage means the risk rises with it, not that paying that much is safe. The default rent and vacancy are reference values placed so the calculator does not open empty, not market quotes, so replace them with the figures for your own property.