What is Effective Annual Yield in Real Estate?

What is Effective Annual Yield (EAY)?

Effective Annual Yield is a measure that calculates the actual annual return on investment, taking into account the compounding effect of any periodic returns within the year. It provides a more accurate depiction of an investor's annual return than simple interest rates or yields that don't consider the compounding effect. EAY is particularly useful for comparing investments with different compounding periods, as it normalizes the returns to an annual basis, allowing for a clearer comparison.

For real estate investments, EAY can help investors understand the true return on their investments, considering not just the periodic income (like rent) but also the compounding of those returns if they are reinvested or if the investment structure involves compounding in some form. This metric helps investors compare the performance of real estate investments with other investment opportunities or between different real estate projects with varying compounding intervals.