What Is Years' Purchase?
Years' purchase is a valuation multiplier equal to 1 divided by the yield. It is the number of years of today's net income a buyer is paying for: multiply annual net rental income by the years' purchase to get a capital value, so a 5% yield means 20 years' purchase.
Years' Purchase in plain English
Years' purchase answers a simple question: how many years of today's net income is a buyer paying for? At a 5% yield, a buyer pays 20 years' worth; at 8%, 12.5 years' worth.
It is the traditional British and Commonwealth way of expressing what US investors call a cap rate. Multiplying the annual net income by the years' purchase gives the capital value.
Formula
Years' Purchase = 1 ÷ Yield; Capital Value = Annual Net Income × Years' Purchase- Yield
- The return buyers accept for this kind of income, as a decimal (6% = 0.06).
- Annual Net Income
- Rent after the costs the owner pays - the same idea as net operating income.
Related forms: Yield = 1 ÷ Years' Purchase; Capital Value = Annual Net Income ÷ Yield.
This perpetuity form assumes income continues unchanged forever; income for a fixed term uses a lower, term-specific years' purchase.
Worked example
Years' purchase on $30,000 of net income
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Annual net income
- $30,000
- Market yield for this kind of property
- 6%
| Step | Calculation | Result |
|---|---|---|
| 1. Years' purchase at 6% | 1 ÷ 6% | 16.67 |
| 2. Capital value | $30,000 × 16.67 | $500,000 |
| 3. Years' purchase at 5% | 1 ÷ 5% | 20.00 |
| 4. Capital value at 5% | $30,000 × 20.00 | $600,000 |
Capital value at a 6% yield: $500,000. A buyer paying $500,000 is paying 16.67 years of today's income. If the market accepts a 5% yield instead, the same income is worth $600,000 - one point of yield moves the value by $100,000.
What this calculation leaves out
- This is the perpetuity form: it assumes the income continues unchanged forever. Leases with a fixed term use a years' purchase for that term, which is lower.
- Years' purchase is just the reciprocal of a cap rate; the two methods give the same value from the same yield.
Calculate Years' Purchase
Years' purchase calculator
1 ÷ Yield; Value = Annual Net Income × YP
Why it matters
It is the reciprocal of a cap rate, so the two describe the same price: a small change in the yield buyers accept moves the multiplier, and the value, a lot.
Because value is income times years' purchase, a one-point change in yield moves value sharply - from 16.7 to 20 years' purchase when yields fall from 6% to 5%, a 20% jump in value for the same income.
When Years' Purchase is used
- Reading UK, Irish, Indian and other Commonwealth valuation reports and investment listings.
- Converting a quoted multiplier into a cap rate (or back) to compare with US deals.
- Valuing ground rents and long leases, where a term-specific years' purchase is used.
Common mistakes
- Applying a perpetual years' purchase to income that ends when a lease expires.
- Using gross rent instead of net income.
- Forgetting the yield is a decimal: 1 ÷ 6 is not 1 ÷ 0.06.
Years' Purchase: frequently asked questions
Is years' purchase the same as a cap rate?
It is the reciprocal of one. A 5% cap rate and 20 years' purchase describe the same price for the same income.
How do you calculate years' purchase?
Divide 1 by the yield as a decimal. At 8%, years' purchase is 1 ÷ 0.08 = 12.5.
Is a higher years' purchase better?
It depends on whether you are buying or selling. A higher multiplier means a higher price for the same income, so it favours sellers and means a lower yield for buyers.
More Investing Terms
Recommended next step
Work out the yield, and so the years' purchase, from a property's income and price.
Cap rate calculator →Apply it to a specific property: Cap Rate Analysis.
Sources and review
No regulator defines this term; the page follows common industry practice.
Where this applies: Not regulated. Investment and valuation ratios are industry and appraisal conventions; lenders, appraisers and analysts may define inputs differently, so check how a figure was calculated.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
Understand a property's costs and risks before you make an offer
Use the free calculator for your own numbers, or analyze a specific home before you commit.
Or analyze a specific property: Essential Property Analysis, $19 · Property Decision Analysis, $49 · Professional Property Analysis, $99. You choose the depth before you pay.