How to Calculate Property Rental Yield
Calculating Property Rental Yield
How do you know how profitable your investment will be?
Firstly you need to understand that when dealing with investment property there are two types of yield. “gross yield” and “net yield.”
There are other types of yield that can be applied, but these two types are the main ones you need to know about to see if a rental property is profitable or not. These are the base yields and calculated inaccurately may mean your property investment isn’t the investment that you thought it was!
Gross Property Rental Yield.
Gross yield is calculated by dividing the properties annual rent by the property value. This is then expressed as a percentage.
Gross yield = (Annual Rent / Property Value) x 100
Monthly rent of property is £800 giving you an annual rent of £9,600 (12*£800) The property is valued at £200,000. Your gross yield is 4.8% ((£9,600/£200,000 = 0.048) x 100)
Gross yield is 4.8%
Net Property Rental Yield.
Property investors usually take net yield a lot more seriously than gross yield as the net yield is the actual profit that is made from the investment.
Net yield is calculated by taking away the properties overhead costs from the annual rent. You then divide this figure by the property value. Net yield is expressed as a percentage.
Net Yield =( (Annual rent – Annual Costs) / Property Value x 100)
If the annual rent for a property is £9,600, the direct costs (insurance, gas safety certificates, boiler repair cover, other annual overheads) are £600 and the property value is £200,000. Your net yield is 4.5% (((£9,600-£600) / £200,000 = 0.045 ) x 100
Net Yield is 4.5%
Learning how to calculate property yield is paramount to your property investing success. Not only learning how to calculate it but also learning how to ask the question when discussing property with other investors. It would be in the sellers best interests to always quote gross yield as the percentage will be higher than the net yield.
Some may argue that net yield is not a true reflection on the investment as it differs with the buyers buying ability. As with the laws of buying in bulk, the more you have the cheaper the cost price. Your overhead costs may be cheaper when you have several properties and not just 1 or 2.
Amazingly you can even get an app that calculates your rental yield on your apple device, example: http://itunes.apple.com/gb/app/rental-yield-calc/id428244107?mt=8 Not tested this app but at least it is good to know that they are available.