% Yield - What Is This? How Does It Work?

There's no shortage of factors to take into account when deciding if a property is a good buy-to-let investment. The most common tool used to simplify the process is a measurement called yield.

 09/01/2018  |  Chris Wood

Yield is the anticipated financial return of your investment property over the course of one year, in relation to how much you bought it for. It shows the annual rental income as a percentage (%) of the property’s purchase price. 

Gross Yield V. Net Yield 

Yields are classified as either Gross or Net – there is quite a difference! It’s natural to consider the Gross Yield first, and then look at the Net Yield, if the investment property is a serious contender. 

Gross Yield 

First off, and easiest to work out, is the gross yield. This is a rough calculation of how much you will get back from your investment (yield).

How to calculate Gross Yield 

You will see that the gross yield doesn’t take any ongoing or initial costs into account. It is simply the rent and the purchase price. It’s a decent start but clearly doesn’t give you the most accurate appraisal of a proposed property investment.

Net Yield 

To put it another way, the net yield is more like the “real yield”. To calculate the net yield, you should include all the fees, taxes and expenses associated with your investment property.

By including ALL the information, you get a net purchase price;

Net Purchase Price 

This gives a net purchase price of £170,100. 

By including ALL the information, you get a net annual rental income;

Calculate Net Annual Rental Income

This gives a net annual rental return of £3,020 (£251.66pm). It’s helpful to break down into a monthly amount!

So based on a net purchase price of £170,100 and a net annual rental return of £3,020, the Net Yield is 1.8%. 

ROI (Return on Investment)

It can be a bit deflating for your yield figure to go from 6.2% to 1.8%, so I feel the last word should go to ROI.

Return on investment is another way to measure whether or not to purchase your buy-to-let. It focusses on the exact money you have invested, and not the property value.

If you are comparing how well you can make your money work for you, against other investments like pensions or stocks, then this is the cleanest way to do it.

ROI

I love to crunch the numbers and I hope this has been helpful. If you liked this, then do read our next artcile on Return on Your Investment & Leveraging

Please drop me an email to chris@portolio.co.uk if you have any questions.

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