Landlord advice - Do you know your numbers?
As a property investor it is essential that you know your numbers. When people talk about a property yield or return on investment (ROI) , what does it actually mean? These figures are crucial in assessing the viability of a property purchase whether you are focusing on a cashflow outcome, or the capital appreciation of a property.
Simply put, the yield on a property is calculated as the annual return on the capital investment and is usually expressed as a percentage of the capital value. It can be can be calculated in several ways but for simplicity we will deal with the two most common ways - Gross Yield and Net Yield. There is a simple formula to work these figures out.
Gross yield as the name suggests, is the income return (as a percentage) on an investment before expenses are deducted. It can be calculated by dividing the property’s annual rental income by the property value.
Gross Yield = Annual Rent/Property value
A simple example could be:
Monthly rent = £800.00
Annual rent = £800.00 x 12months = £9,600.00
Property value = £225,000.00
Gross Yield = £9,600.00/£225,000.00 = 4.2%
Following on from above, Net Yield can be calculated by deducting your operational expenses from the annual rent and then dividing that figure by the property’s value.
Net Yield = (Annual Rent - Operational Expenses) / Property value
Success in property investment is a numbers game!
Alex Britchfield | Partner | Davies & Partners