Last month, I calculated the yield for two properties listed side by side in Ridgefield. One was priced at $550,000 with a monthly rent of $2,300, and the other was $620,000 with a monthly rent of $2,600. Simply comparing the rents, the second property seems better, but when converted to yield, the order often reverses.

The first thing to calculate is the total yield. You divide the annual rental income by the purchase price and multiply by 100. For the first property, dividing the annual income of $27,600 by $550,000 gives a yield of 5.0%, while the second property, with an annual income of $31,200 divided by $620,000, results in a yield of 5.03%. The total yields of the two properties are almost identical. In a neighborhood like Ridgefield, where the average rent according to RentCafe is around $3,100 and the median home value according to Zillow is $646,200, both the purchase price and rent are rising, making it difficult to see differences in total yield alone.

The problem arises next. Total yield does not account for operating costs such as property taxes, insurance, management fees, maintenance costs, and vacancy losses. Bergen County is known for its high property tax burden, with an effective tax rate averaging around 2.4%. For a property priced at $550,000, this means an annual property tax could be around $13,000. Adding insurance, maintenance costs (about 1% of property value), and vacancy losses can often reduce the net operating income (NOI) to about half of the total income. Applying the 50% rule, the NOI for the first property is estimated at about $13,800, while the second is around $15,600. When divided by the purchase price, the cap rate for both properties is again similar at 2.5%.

But it doesn't end there. If you utilized a down payment and a loan, you also need to consider the cash-on-cash return to see the actual perceived income. Assuming a 20% down payment, the actual investment amount would be 20% of the purchase price plus closing costs. Dividing the pre-tax cash flow, excluding mortgage principal and interest, by this amount yields a different number than the cap rate. During periods of high interest rates, cash-on-cash returns often come out lower than the cap rate, while if you purchased earlier at lower rates, the cash-on-cash return may be higher.

It's also worth noting that even within Ridgefield, areas close to the commercial district on Main Street and quiet residential neighborhoods experience different rental demand and vacancy rates. If you want to check school district information preferred by Korean families, refer to GreatSchools or Niche ratings, but keep in mind that school district boundaries change frequently, so it's advisable to verify the assigned school for the specific address before purchasing.

If you are moving from another state, one aspect that can be easily overlooked is the property tax burden, which can be judged based on the tax experience from your previous residence. New Jersey also has a relatively high state income tax rate, so it's wise to consider after-tax cash flow when calculating rental income.

The commonly used 1% rule in the industry is also worth applying. This rule suggests that if you can charge 1% of the purchase price as monthly rent, the cash flow is likely to be healthy. However, the first property, with a monthly rent of $2,300, falls far short of the $5,500 that is 1% of $550,000, and the second property also does not meet the $6,200 that is 1% of $620,000. In high-priced areas like Ridgefield, it is realistic to keep in mind that finding properties that meet the 1% rule can be challenging.

It is also important to note that narrowing the yield to just cap rate or cash-on-cash return overlooks the potential for appreciation. In areas like Ridgefield, where demand continues steadily within Bergen County, you need to consider not only the annual rental cash flow but also the increase in asset value as the loan principal is paid down, along with the appreciation of the purchase price itself to gauge total returns. However, keep in mind that property values can rise or stagnate, so it cannot be assumed that they will always increase.

Ultimately, total yield, cap rate, and cash-on-cash return are tools that show the same property from different angles. Rather than immediately concluding that a property with high apparent rent is a good investment, it seems more realistic to compare all three metrics together. This article is not investment or legal advice, and it is recommended to verify specific numbers with an accountant or real estate professional before making any contracts.