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Stacking up a deal to figure out whether a letting property is worth the time and bother of buying and doing up is a regular exercise for landlords.
Property professionals generally have a checklist to tick off the pros and cons of buying a home – and yield is one of the critical factors. Yield is the return a landlord can expect to see on their investment.
Sometimes called return on investment or ROI by accountants, the calculation returns a percentage based on the cost of the property and the income generated during the year. The rule of thumb is the higher the percentage, the greater the yield, so the better the return on investment. Yield is generally worked out as a gross figure.
The yield is (6,500/100,000) x 100, which is 6.5%. The figure is gross because the calculation does not include any property business expenses. Working out the net rental yield is a similar calculation, but the property’s running costs are subtracted from the annual rent.
These costs cover expenses such as mortgage interest, insurance, letting fees, repairs and maintenance. If the annual running costs of our buy-to-let property are £2,500, the net yield calculation becomes ((6,500 – 2,500)/100,000) x 100, which is 4%. The problem with the yield calculation is that to make sense of the figures; a benchmark is needed. Find this by grabbing the rents and values from websites of similar letting properties within half a mile or so and calculating their gross yields.
Don’t forget the yield figure in isolation is no good without a benchmark figure to put the result in context. When considering a purchase, you should also factor in the following:
The simple reality is that to make even a tiny profit after the mortgage has been paid; you need a yield of 10 - 12%. Anything less will make it very difficult to make a profit until the property has been paid. You may think these yields are impossible to find, but that is not true. You have to be patient. That being said, we understand that finding such returns is challenging.