What is a Property Yield?

Novice investors often ask the same questions and time and again comes up “what is a property yield?” It may be the terminology that people find confusing but it can be just as complicated for the experienced landlord if they don’t use yield as a measurement of return on their investment.It’s not necessarily the best way to measure any sort of return as it doesn’t allow for what went in up front or any of the on-going expenditure. The simple yield is calculated as the monthly revenue against the cost of purchase. For example let’s say we agree to purchase a property at £100,000 and it can rent for £600 per month then the basic yield could first appear to be 6% and some people may well have you believe this however in reality £600 per month is only 6% monthly yield on £10,000 not £100,000 which is very different. As there are twelve months in a year it would be 6% from £120,000 purchase. Now £600 of rental income to £100,000 of property value is often seen as a safe bet in terms of coverage for expenditure when assessing a property’s worthiness to buy but it’s not even the way to work out simple yield as 6% as it has to be taken across a one year period so £600 rent per month times twelve months is £7,200 which is actually 7.2% and that is for a £100,000 property but not what professional landlords want. However even when we work out the simple yield in the right way it still doesn’t allow for many of the usual property dilemmas like voids between tenants or non-payment by tenants. What’s more when we compare returns to purchase price we are not including all costs of purchase such as borrowing costs, legal fees, stamp duty, management costs, possibly even service charges etc. These can mount up to a considerable sum. So when we ask “what is a property yield?” we need to examine the figures a bit deeper particularly if we are relying on them for our prosperity.

With most property deals a lot of money or value is usually at stake and making a mistake on the estimation of return when we are borrowing to fund a purchase can be a recipe for disaster. Far better to look at the total cost of purchase which for our £100,000 house could be £105,000 then look at our rental income on a ten month basis to allow for maintenance and voids so it would then be £105,000 divided by £6,000 which is less than 5.72%in real terms. Obviously this is far better than any bank rate but not a great amount when you consider you are taking on borrowing risk and there is no guarantee also whilst interest rates are low it can be sufficient, but add in economic changes and see how it looks. Our advice is normally to look for a return on investment of a minimum 10% and so that my mean what is give as a simple yield of 13% or more.

Whenever we invest our hard earned money we really have to look at the end result from the total funds employed and whilst we borrow money and can get a return on money which effectively isn’t ours it doesn’t mean we should be glib with it either. It’s always better to have more income than not enough and many landlords have fallen foul of thinking the more properties they own the richer they will be. That can be the case if they are all working and managed right but if not they will suck out funds faster than they can be replenished. Far better to have fifteen houses earning good cash flow than a hundred and fifty losing money. Simple is efficient and everything has to be managed. Rarely do things go wrong in ones. Strange as it may seem if a boiler breaks down in one property there are normally another two coming up for repairs. An additional amount of money in savings for such emergencies is always a good idea.

So whenever we ask what is a property yield? We should really be asking several questions. What is the return on investment of all the money employed? What is the return on investment of the money we put into the deal? What is the return on the borrowings and is that return sufficient to cover every eventuality when the interest rates rise? By breaking down our costs we can see what we need to get in rent to make a place viable. Without the coverage on the rent against money risked you are likely to be heading into a major black hole financially. Property has never been and never should be seen as a get rich quick scheme, it could be said to be a get rich easily scheme but miss out on the basic ingredients of understanding money and you’ll still have problems. None of us are able to predict anything with any certainty so don’t listen to anyone who says this is a bad time for there is never a better time to get started than right now.

Always make life easier for yourself by having some experienced help.

Written by:
Lionel Palatine – He is a regular networker and a speaker at events as well as being a property author and adviser. He joint ventures deals and shows people how to buy property for low cost which are inclusive of all fees and deposits.

You can find him on regular social media Twitter |  Facebook  |    |  YouTube  don’t forget to add him

Comments are closed.