Maths question - how much return am I making?

ahfh1

Hi,

I've heard that if you're renting out property, then always aim for a return of 10% to 20%. But how do you calculate the 'return'?

Say my monthly mortgage is £500, and the monthly rent I receive after tax and agency fees is £1,000, then what is my monthly 'return' and how is it calculated?

Cheers

Blackpool_Saver

I would love to know this too

Doozergirl

What you make on top of your mortgage in return is really irrelevant as your mortgage could be 100% or 10% of the value of your home. You could be earning more with cash in the bank or indeed in a different type of property.

Yield is calculated by dividing your yearly rental income by the value of the property.

ie. £500 per calendar month on a property worth £100,000...
12 * 500 = £6000
£6000/£100000 = 6% yield.

Overall the cheaper and/or smaller the average, the higher the yield you will get. If you were looking for a BTL then you would be calcualting the yield for each property that you viewed - that is how you would make a balanced decision by creating a level playing field.

new_home_owner_3

is that the value of what the property is when you are renting it or what you bought it for?

I mean i have a house it was bought for 105000 and its now valued at 150,000 pounds, i rent it out for 650 pound a month and my mortgage payment is 370 pound a month, whats my yield on that?? i know it may be low if its worked out on 150,000, but i dont owe that much and as long as ot covers my mortgage im happy.

Gwhiz

new_home_owner wrote: »

is that the value of what the property is when you are renting it or what you bought it for?

I mean i have a house it was bought for 105000 and its now valued at 150,000 pounds, i rent it out for 650 pound a month and my mortgage payment is 370 pound a month, whats my yield on that?? i know it may be low if its worked out on 150,000, but i dont owe that much and as long as ot covers my mortgage im happy.

It should be the return on the capital you used to purchase the asset. So the MONEY you used when you purchased (that would include associated finance costs too). HOWEVER for comparison purposes you would also want to do it against the current value of the property so that you can decide if another asset class may be a better investment.

Regshoe

Speaking as an accountant terms like "Return" and "Yield" don't necessarily have formally fixed status (i.e. a PLC could use different interpretations in their published accounts quite legally - so long as they define how they have calculated the figures).

When you say "Yield" or "Return" you need to know with reference to what (although if you are comparing different properties the main thing is to make sure that you use a consistent basis for each).

In this case I would probably also go for Yield = rental income / property value

so (650*12)/150,000 = 5.2% (Gross Yield)

A better measure might be return on capital employed, i.e. how much you are making based on the equity you have tied up in the property:

ROCE = ((650-370)*12)/(150000 - value of your mortgage)

So if your mortgage is say 50,000 then your ROCE = 3.36%

The advantage of this method is if your property is being using purely for investment purposes you can see whether you would be likely to get a better return by just selling and putting your money in to a savings account. Obviously you would want to take into account selling fees, your costs as a landlord on top of the mortgage and the fact that by selling you would not benefit from any increases in value of the property (or vice versa).