Gross Yield - What is it???

badgerman_2

I have looked at several threads and am now more confused than I was in the first place.

Can someone please explain to me in the most simplistic of terms how to work out the yield potential on a property for BTL.

Thanks in advance

Debt_Free_Chick

Based on the original purchase price

Annual income (from rent) / purchase price x 100 = %age yield

e.g. you bought a property for £180,000 and let it out at a rent of £750 pcm

9000/180000 x 100 = 5%

But you might also want to consider the yield based on the current valuation of the property - especially if you've held it for some time and not reviewed the rent. In which case, put the current valuation into the equation above, in place of the original purchase price.

e.g. the property is now valued (realistic!) at £240,000

9000/240,000 x 100 = 3.75%

Debt_Free_Chick

Forgot ...

the gross yield ignores everything you pay out for maintenance, voids, absconding tenants etc. Any expenditure on these issues reduces the gross yield e.g. the property is vacant for 3 months in between one tenant moving out and another moving in. So your gross yield for that year is

6750/180000 x 100 = 3.75%

Or, based on the current valuation,

6750/240000 x 1400 = 2.8125%

Simply put, the yield is the amount of income generated per 100% of capital invested. Income = rent and capital invested = purchase price or current valuation.

badgerman_2

A lot clearer now, thanks to you both.

F_T_Buyer

Really when people talk about yields with property, they are talking about current valuations. As someone could have bought the house in 1980 @ £3,000 (which looks good on paper).

Looking only at the purchase price isn't looking at the whole picture.

RHemmings

F_T_Buyer wrote:

Really when people talk about yields with property, they are talking about current valuations. As someone could have bought the house in 1980 @ £3,000 (which looks good on paper).

Looking only at the purchase price isn't looking at the whole picture.

It used to be the case that landlords would expect a property to have a gross yield of 8% or so before they would invest in it. At the moment people are prepared to buy property with much smaller yields as they expect property to continue rising in value as fast as it has been over the past ten years.

Debt_Free_Chick

F_T_Buyer wrote:

Really when people talk about yields with property, they are talking about current valuations. As someone could have bought the house in 1980 @ £3,000 (which looks good on paper).

Looking only at the purchase price isn't looking at the whole picture.

I can see arguments for using both.

Firstly, if you use the original purchase price, that reflects the amount of capital you originally tied-up in the property (let's ignore the effect of gearing/mortages for a moment and assume a cash purchase!). So the yield would be a fair comparison for what you would get, if you had the money in a building society instead, but drew down the monthly interest as income e.g. you bought for £180,000. Currently you are getting a yield of 8%, but if you had £180,000 in a savings account, you would only be getting 5% yield (interest). You have to ignore the compound effect of leaving the interest in the savings account, as there is no comparable way to do this with the rent on the property - you get the rent as income each month.

Of course, you should also look at the yield based on a current valuation as, irrespective of what you paid for the property, the amount of capital you would get back if you sold, is based on the current valuation and nothing to do with what you paid for it. In other words, if the property is currently valued at £240,000, then that is the capital (roughly) you would realise and that's the amount you could put in the building society for the next year.

I think there's no "right or wrong" and that both yields have their place - depending on what you're trying to achieve.

Regards

Debt_Free_Chick

RHemmings wrote:

It used to be the case that landlords would expect a property to have a gross yield of 8% or so before they would invest in it. At the moment people are prepared to buy property with much smaller yields as they expect property to continue rising in value as fast as it has been over the past ten years.

And this is where things start to get a little fuzzy.

It used to be the case that property was bought to let purely because of the income (yield) it produced. Any capital appreciation was secondary - and it would have to be discounted to reflect inflation anyway.

now ... it seems that many BTLs are being bought primarily for the (hoped for) capital appreciation .. with the income (yield) being secondary or, in some cases, almost irrelevant.

There is nothing inherently wrong with that - but I remain unconvinced that many really understand what they're buying.

Over short periods, you might just as well hold the property and get the capital appreciation alone - ignoring the rental income, avoiding the cost of refurbishment and avoiding the hassle of voids etc.

Interesting ..... :rolleyes:

RHemmings

Debt_Free_Chick wrote:

And this is where things start to get a little fuzzy.

It used to be the case that property was bought to let purely because of the income (yield) it produced. Any capital appreciation was secondary - and it would have to be discounted to reflect inflation anyway.

now ... it seems that many BTLs are being bought primarily for the (hoped for) capital appreciation .. with the income (yield) being secondary or, in some cases, almost irrelevant.

There is nothing inherently wrong with that - but I remain unconvinced that many really understand what they're buying.

Over short periods, you might just as well hold the property and get the capital appreciation alone - ignoring the rental income, avoiding the cost of refurbishment and avoiding the hassle of voids etc.

Interesting ..... :rolleyes:

But for the capital appreciation to last, houses have to keep on getting more and more expensive. A point is reached where houses cannot get any more expensive because people just cannot afford them. Then people who might buy the properties to let will not be satishfied with a tiny rental yield. I think gross yield is a very important measure of the housing market as it indicates to what extent houses and flats are being bought as they are expected to appreciate. If you have a house with a 2.5% gross yield, which is not unknown, then it only makes sense as an investment if the value will appreciate. And when house prices reach a limit of affordability, they can no longer appreciate. So anyone selling that house with a gross yield of 2.5% may find that the only people willing to buy would only be prepared to pay a price that gives them an 8% yield again.

The Daily Mail today has an article on the front page which says fairly forcefully that we've just about reached the limits of affordability.

whambamboo

RHemmings wrote:

It used to be the case that landlords would expect a property to have a gross yield of 8% or so before they would invest in it. At the moment people are prepared to buy property with much smaller yields as they

have given up being landlords and instead got into risky highly leveraged property speculation.

F_T_Buyer

If you put £100 into a bank paying 5% interest, you would get 5% yearly yield on that account even if you left that money in their for ten years.

At the end of the 10th year, the amount in your account would be £155.13

If you were to look at the yield based on the purchase cost, i.e. £100 in this case, you would conclude you are getting a yield of 55.13%.


Now if you were to come on here saying you have a savings account yielding 55.13% you would be shot down. Therefore when talking about yields you need to look at the current value. I.e. anyone investing in the savings account would only receive a 5% yield in this example.

What yield would you say someone has is they won/inherited a house? An infinite yield?

I can understand why you need to look at your profit and loss (hence purchase price), but to claim that is your yield is simply wrong. A lot of people get this wrong, portraying they have a better investment than they really have.

The next argument is how to guestimate your current value.

Edit:
You really need to call the yield on your purchase cost a return or gross profit.