Rental yield and cap rate, explained simply

By Parish Rao · 25 August 2026 · 5 minute read

If you own a shop or an office, these two terms decide what your property is worth to an investor. They sound technical and they are genuinely simple once someone writes them down.

Rental yield

What your property earns each year, as a percentage of what it is worth.

Annual rent divided by property value, times one hundred. A shop worth one crore earning eight lakh a year has an eight percent yield.

That is the gross version. The more honest version subtracts the costs you actually bear, such as municipal taxes, maintenance you pay, and an allowance for periods when the unit is empty. That gives net yield, and it is always lower than the gross figure people quote.

Cap rate

The same relationship, used in the other direction.

Yield starts with a known value and works out the return. Cap rate starts with a known income and works out the value. Net annual income divided by the cap rate gives you the property value.

So they are two views of one idea. Investors quote cap rates when deciding what to pay. Owners quote yields when describing what they have.

Why commercial yields beat residential

Residential property in Indian cities typically yields low. Commercial usually yields considerably more.

The reason is not that commercial is better. It is that commercial carries more risk and more work. Tenants leave and units can stay empty for months. Fit outs cost money. Tenant quality varies enormously. Buyers demand a higher return because they are accepting all of that.

Meanwhile residential is bought partly for use and partly for capital appreciation, which pushes prices up relative to rents.

What your own number tells you

Work out your net yield honestly, then think about what it means.

Unusually high? The market may be pricing in a risk you are not counting. A short lease, a weak tenant, a declining area, or a paperwork problem.

Unusually low? Either your rent is below market, which is fixable at renewal, or the property is being valued for something other than its income, such as redevelopment potential.

Both are useful signals. Neither is visible if you only ever look at the rent.

The trap in using published averages

Reported yield ranges for offices, retail and warehousing are broad averages across whole cities. Your specific property has its own tenant, its own lease and its own street.

Applying a city average to a single unit is how owners end up with a number that is confidently wrong. A valuation uses the evidence for your property, explained in how commercial property is valued.

See our commercial valuation service, or tell us the rent and the lease terms and we will explain what it implies.