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Yield

The yield on a property is the gross profit on your capital investment (after the deduction of expenses, but before tax), which varies depending on how much you paid for a property and the rent. Generally the cheaper the property the higher the yield. For example, if you buy a property for £100,000 and let it for £700 per month (gross income £8,400 a year), your gross yield is 8.4 per cent (8,400 divided by 100,000 = 0.084 x 100). If you buy a property for £200,000 and let it for £1,200 a month (£14,400 a year) your gross yield is 7.2 per cent. This is a simple example to illustrate that yields are usually higher on cheaper properties and doesn’t take into account your costs.

Costs may include purchase costs, furniture and furnishings, service charges, ground rent, insurance, wear and tear, agent’s fees, cleaning, maintenance and decorating, void periods, council tax (when a property is empty), etc. – but not your mortgage payments. These must be deducted from your gross income in order to calculate your net income and net yield. For example, if you buy a £200,000 property, earn £15,000 a year in rent and have costs of £5,000, you have a net income of £10,000. Your net yield is therefore £10,000 divided by £200,000 = 0.05 x 100 = 5 per cent – but bear in mind that you still have to pay tax on your net income! Note that you should always use the current market value of a property to calculate the yield.

Yields vary and can be less than 5 per cent and as high as 15 per cent or more. In 2004 yields were historically very low with returns in London in autumn 2004 just a few per cent, while northern cities had higher yields of up to 10 per cent (the average is around 5 per cent). Rents have fallen in the last few years while house prices have risen, although by mid-2004 rents had levelled off in most areas. (Due to the low rental returns on residential property, some professional investors were turning to commercial property in 2004.) Buying to let isn’t a good idea if your maximum rent will barely cover your mortgage and you have little other disposable income and are relying on 100 per cent occupancy. However, if you buy off plan and rental returns aren’t sufficient to pay your mortgage, you can usually sell quickly and make a profit.

Take care – with the property market stagnating in the south of England (particularly London), many people were struggling to attract tenants in late 2004 and house prices were static or fell in most of London in 2004.

© Survival Books Limited 2005

“Buying, Selling & Letting Property” 2nd Edition, David Hampshire.
Reproduced with the permission of Survival Books Limited.

Further information on this topic can be found in “Buying, Selling & Letting Property” 2nd edition, by David Hampshire.

For extensive, annually updated information about buying, selling and letting property, you can purchase this book at www.survivalbooks.net

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