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So I’ve been looking at yield as a basis for making property investment decisions. It’s been suggested that you have a certain percentage yield in your head and if the purchase price vs achievable rent give you your yield then the purchase is a good deal.
We have “gross yield” which is purchase price divided by annual rent.
We then have “net yield” which is purchase price divided by annual rent minus expenses.
See below example calculation for net yield.
3 bedroom London = £365K (based on average asking prices) + stamp duty of £8,250 = £373,250
Achievable rent = £1,900 pcm (£22,800 annually)
*mortgage payments = £7,944
*10% of rental income to agent = £2280
*10% of rent for repairs = £2280
*£600 service charge
*Voids (1 months’ rent per year) = £1,900
Net annual income from rent: £22,800 - £10,444 = £12,356
(£373,250X100)/£12,356 = 3.31%
So my question: have I worked out the net yield correct? Also what net yield figure do people look for?
If it's an additional property the stamp duty will be £19,200 to buy the property.
You also have to pay tax on the £12,356. Depending on your personal circumstances 20% / 40% or more.
You will start to lose mortgage relief (unless it's held in a Ltd company) so the tax will be on the amount of rent received £22,800 in a couple of years (20 or 40 % tax payable of this figure, minus costs although you will not be able to deduct the mortgage costs)
How much deposit will you be putting into the property?
I'm looking at 25% but there is scope to put in more - still working out if it is better to go with a higher deposit.
OK, so the tax on the rent and the loss of tax relief on mortgage payments (guessing this applies even if you're paying interest only on the mortgage) would drive the above yield figure down below the 3.31%.
Do you have a view on what sort of net yield figure we should be looking for? I'm guessing we should be aiming higher than 3%. I've heard people talk about 8% but not sure if they are referring to net or gross yield.
I use a gross yield of 8% as a quick initial assessment and filter Then I work out the return on investment which takes everything else into account and can also be calculated over a future period. That works for me because I tend to always look for the same type of property. Other models may be different for other markets.
Yield is one consideration - Gross or net . But don`t reject a deal just because the yield is lower than your target. The value in the deal might be in the discount price you purchase at and what added value you can do to the property to increase the rent afterwards and thereby the yield.
Also 1 mths void per month is too much for me. Two weeks per year max maybe . Some of my tenants have been with me 15 years which brings the average down overall to much lower than 2 weeks.
As Alison says you have to look at the whole ROI which is far more involved than just a static initial yield figure. Having said that what you have outlined is a good solid starting point to work out from .
Jonathan Clarke. https://www.buytoletmk.com
Very wise words from Jonathan Clarke! I agree with your approach on this; I see many investors getting hung up on nett yield without looking at the bigger picture, and focusing in on retaining tenants etc.
All the best
This may be of some use to you. This was a tool that a client utilised some time ago which he found very useful.
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