Member Article

Understanding Property Yields

Property yields give you a useful comparative tool for calculating the potential of one property versus another. You can quickly work out the most profitable option, whether you are comparing several new properties, or properties already in your portfolio. Your returns, or potential returns, can then be compared to regional and national averages so you can monitor how your properties are performing.

With the rental boom showing no signs of slowing down, buy to let properties are an exciting investment opportunity for many people, but make sure you’re clued up on yields to help you make the right property investment choices.

There are two basic calculations: Gross Yield and Net Yield.

Gross Yield

The Gross Yield is the total amount of rental income generated over a year, as a percentage of the property’s purchase price or current value. So the calculation looks like this:

Annual rental income / Purchase price or Value X 100

So, for example putting some sample figures in, with a rental income of £550 a month (giving a gross rental income of £6,600 a year) and a property bought at auction for £92,000:

6,600 / 92,000 X 100 = 7.17% gross yield

Some property professionals prefer not to use a full annual rental income in the calculation, as the property may not be let for a full12 month period. Calculating gross yield on, say, 10 months rental income can often give a more realistic figure. So in this scenario and using the same figures from the example above, the calculation would be:

5,500 / 92,000 X 100 = 5.98% gross yield

Straightaway you can see the decline in yield if the property remains empty, even for a few months.

Net Yield

The Net Yield is a similar calculation but takes in to account the running costs and fees (such as ground rents, landlord insurance, letting agent fees) and the cost of maintaining the property (such as renovation work and decorating).

Let’s assume the running costs come to £1,200 a year, then your net rental income falls to £4,400 a year, assuming the property is let for a full 12 month period:

(6,600 – 1,200) / 92,000 X 100 = 4.78% net yield

It’s calculations like these that can help you work out the viability of a property and help you determine if you want to sell a property to look for one with a better return, and to work out which of several properties you own is generating the best return for you. When looking at buying a new property the yield can also help you determine the return you are likely to achieve and so help you decide if it will be a worthwhile investment.

Yields on other buy to let property types such as those with Houses of Multiple Occupancy (HMOs) can be higher, especially in city’s with a large population of young professionals and students.

In summary, it’s useful to understand yields and use them to your advantage, whether you are acquiring or disposing of investment property.

This guide is for general information purposes only and does not constitute advice. Brendons Auctioneers does not accept any responsibility or liability for any action taken as a result of reading any part, or all, of the information in this guide.

This was posted in Bdaily's Members' News section by Ron Bell .