If NIY tells you where you are now and reversionary yield tells you where you could be, equivalent yield gives you a single blended number that captures both.
Equivalent yield is the constant discount rate that makes the present value of all your expected future income — current rent until lease expiry, then ERV thereafter — equal to the purchase price. In plain English, it answers the question: if I ignore growth and treat all future income as one stream, what yield am I buying?
The calculation requires a bit more work than simple yield. You need to know the current rent, the time until the next rent review or lease break, the ERV, and the expected holding period. You then run a discounted cash flow and find the rate that balances everything out.
In practice, professional valuers use equivalent yield to compare properties that have different lease structures. A property with a long lease at a low rent might have the same equivalent yield as a property with a short lease at a high rent. The equivalent yield lets you compare them directly.
For most residential investors, equivalent yield is more than you need. But if you are moving into commercial, or if you are looking at mixed-use buildings where leases expire at different times, this is the number that professionals use to make decisions.
Why this matters
Equivalent yield is the Swiss army knife of commercial property metrics. It lets you compare any two income-producing properties on a level playing field, regardless of their lease structures. Not essential for day one, but indispensable as your portfolio grows.
If you want to know exactly what a property is worth before you make an offer, Xelox Properties can help. We run the numbers so you do not have to.