It’s all about the Yield…what’s it all about?
As it’s the start of the week and you’ll be waiting for my weekly buy to let deals, Â I thought it would be useful to those new to the market to go through yields.
Yield is another word for return so yield is of course very important to landlords as any buy to let purchase should be regarded as a business investment.
Yields can be described as a gross yield or net yield.
The gross yield is a simple calculation on rent received against the purchase price.
The net yield goes that bit further and looks at recurring expenses such as mortgage payments, service charges, insurance, etc and takes these into account before providing a yield (or return on investment).
So let’s put this in practice! Say you purchase a property for Â£100,000 and you receive Â£600 per month in rent.
1. Work out the annual rent: Â£600 per month x 12 months = Â£7,200 per year
2. Divide the annual rent (Â£7,200) by the purchase price (Â£100,000) x 100 = 7.2%
That’s it! So in this example, the return or yield for the landlord is 7.2%Â
Now, using the same rent and purchase price, let’s have a look at net yield (net return).
Let’s say the following expenses are incurred by the landlord per month:
Service Charge Â£50
1. Take all the monthly expenses (in this example, Â£270) and x by 12 for annual expenditure (in this example (Â£3,240)
2. Take the annual rent (in this example, Â£7,200) minus annual expenses (in this example, Â£3,240) = Â£3,960
3. Divide the annual net rent (Â£3,960) by the purchase price (Â£100,000) x 100 = 3.96%
That’s it! So in this example, the net return or yield for the landlord is 3.96%.
So the next time you’re looking at an investment opportunity, don’t forget to do some calculations as to what your yield will be!