I’ve seen lots of websites talking about how to calculate your rental yield. They all say that anything between 5-7% is good, anything lower isn’t worth it. Are they talking about Gross Yield or Net Yield?
On the property I’m buying, my gross yield is a nice and comfortable 6.4%. If I then work out the net yield, it drops to something like 2%. Is it still worth it?
There is an Openrent blog post on yield here: How to Calculate Rental Yield Using Your Property Value, Rental Income and Costs
And this is what I put on another post:
There are lots of ways of calculating it. Eg gross, net, based on cost, based on value, based on investment.
I tend to look at gross yield when I’m looking at buying a property (gross rent/property price).
But then the true return on investment depends on how much you put in.
Eg if you buy a £100k property but you have a 75% mortgage, you probably end up investing about £30k with fees etc. If you get £500pm rent, then the simplest gross yield is 12x500/100000 =6% (but then there are variances in the calculation here to - eg do you add in the stamp duty etc). If you look at it in terms of return on investment, say you make a profit of £4,000 after costs, that’s a return on investment of 4000/30000 = 13.33%.
But then, 10 years down the line, what’s your gross yield - do you base it on what you paid for the property, or do you base it on the value now. I’d always go for value now because that’s what it would be if you bought it now, so if you’re comparing investments you are comparing like with like.
Also, unless you remortgage upwards, based on value, your return on investment will usually go down over time (even though the rent will go up) because as the value of the property goes up, the amount you have invested in it goes up too. Eg if the value of your house doubles to £200k, you effectively then have £130k invested because if you sold it, that’s what you’d have (assuming an interest only mortgage and ignoring tax to keep it simple - I deduct the tax I’d have to pay if I sold - that usually is enough to put me off selling!). So if your profit also doubles to £8k, your return on investment is then 8/130 = 6.1%.
I never think of %. I save up, I buy, I think of the rent then coming in. I think of what a great gift my kids will get.
When I started with rental properties as I always said I created the full time job for my self and never as investment. Even I knew I was not going earn same as what I used to but I am my own boss and took as risk.
An gain in property price it would be good towards my pension and will be able to keep me going for some time.
We all think in different way according to our need, responsibilities, lifestyle and the most important satisfaction and happy with what we got and wanted to achieve.
From my opinion one person say it’s good if return is 3% because of that person’s satisfaction and in other case Other is getting even double return saying it’s not good because that person’s expectations are high and not happy with 6% but wanted 10%.
I would look at net yield as gross income less maintenance, insurance and management. I manage myself so there isnt an explicit cost but it is work separate from an investment, I normally allow £1k a year. Then I do a separate calculation to show return on amount actually invested to allow for mortgage, eg below
200k property(including purchase costs) that rents for 10k pa, gross yield 5%.
Less £1500 for maintenance/insurance and 1k manage leaves net income of £7k, so 3.5% net yield based on total value. I wouldn’t go below 3.5% on this calculation method.
Then with a mortgage assuming 60%Ltv mortgage,with 2% mortgage rate gives mortgage costs of 2,400, so net income after mortgage would be 4600 which is 5.75% income yield on the 80k invested. If you allow for 2% capital growth total return on 80k would be 10.75%. Clearly mortgage rates could go up which would significantly reduce these figures and would also be different for higher rate taxpayers.
Everything is relative. For example, you could’ve bought Apple/Tesla shares last year and be way up or on that hand, a cruiseliner and way down. Point is, what return do you want and what risk are you willing to pay for it-no guarantee of course, even with ‘safe as houses’ property. You also have to be honest about how much time you spend either researching share purchases or managing a property. What is the cost of that time? Your time is not free afterall.
the purpose of a yield calculation is to allow you to compare to other alternative investments, e.g. you get 4% net on property, 0% net on banks, etc. In addition to net/gross you also have to think about real/monetary because now we have high inflation, that means real interest rates on deposits are actually negative (i.e. you put £100 in bank today and after one year if inflation is 5% and interest rates zero then you will have £95 of actual spending power). Therefore the correct tax adjustment for gross to net is the one that allows you to make this comparison, i.e. you have to use your own personal tax rate, and as BTL tax advantages have mainly disappeared then your tax rate will be pretty similar across all asset categories like deposits, real estate, etc. You want to know which investment pays the best after-tax yield so you can make your decision accordingly. And due to inflation, you need to consider real versus monetary returns. Whereas cash gets eaten up by inflation, real estate generally tends to maintain its value above the rate of inflation.