How much operating income does the asking price buy?
Operating Earnings Yield compares annual operating earnings with asking price before the buyer's loan and tax assumptions. Income property uses the secondary name CAP Rate.
Business acquisition
Calculation
CAP Rate is the income-property name for the same formula.
| Input | Value |
|---|---|
| Annual operating income | $120,000 |
| Asking price | $1,500,000 |
- Formula
- $120,000 / $1,500,000 x 100
- Result
- Operating Earnings Yield is 8.0%.
- What it means
- The calculation produces $8 of annual operating income before financing for each $100 of asking price.
Why this number is not enough
Operating yield can look attractive while Actual DSCR, monthly buyer cash flow, or Cash on Cash misses the buyer's target after financing. Operating earnings may also need a buyer adjustment for owner replacement cost when the current owner performs essential work.