Calculating property rental yield

Ymcmatt

Hello i'm seriously looking into investing my money into property however am stuck at working out the yield, unfortunately i don't have 100's of thousands of pounds so i will require a buy to let mortgage to do so, when working out the yield do you include interest on the mortgage in the property value? Or just the purchase price without interest. Thank you in advance!

Ymcmatt

Anybody able to help?

dimbo61

You buy a property for say £100K and rent it for £500 a month
12x£500= £6000 or 6% yield or the £100K cost to buy.
Now you have other costs such as insurance, Gas safety cert, letting agent fees, buying and refurbishment costs etc some of which you can offset against your TAX bill
A good start would be an accountant

Ymcmatt

Thanks for the advice, appreciate it.

As you mentioned the property price 100k obviously im buying with finance do i include the finance on the purchase price?

Carl31

Ymcmatt wrote: »

Hello i'm seriously looking into investing my money into property however am stuck at working out the yield, unfortunately i don't have 100's of thousands of pounds so i will require a buy to let mortgage to do so, when working out the yield do you include interest on the mortgage in the property value? Or just the purchase price without interest. Thank you in advance!

You would need to include all costs, so your cost of debt would be a definite factor, as this can move up and down and so can potentially reduce your return.

Plus other cost as mentioned

Ymcmatt

Carl31 wrote: »

You would need to include all costs, so your cost of debt would be a definite factor, as this can move up and down and so can potentially reduce your return.

Plus other cost as mentioned

The property i was looking at was £78,000 with intrest it rounds up to 100k, so 550 per month on 100k = 6.6 gross? Then i'll need building insurance and other things. Barely worth my time?

Jagman83

I buy property for 70-80k usually min 3 bed pos 4, i convert into 5 bed usually 1 downstairs what was the lounge, i make 1500 gross minimum if all 5 are on DSS and profit £1000 minimum per month. Try that if demand in your area.

GDB2222

Ymcmatt wrote: »

The property i was looking at was £78,000 with intrest it rounds up to 100k, so 550 per month on 100k = 6.6 gross? Then i'll need building insurance and other things. Barely worth my time?

You calculate the yield based on what you paid.

In any case, it makes no sense (to me) to say that interest rounds the price up to £100k. That's interest over how long a period?

And you are calculating yield for what purpose?

slopemaster

The way I work it out is YIELD (gross or nett) = rent as a percentage of the property value, so whether it's mortgaged is irrelevant.

But RETURN ON INVESTMENT (which is what I'm more interested in) needs to take the cost of borrowing into account.

But the usual way of accounting for interest is to deduct the cost of an interest-only mortgage from your rental income - rather than adding the cost of the interest to the 'price' of the house

Ymcmatt

Jagman83 wrote: »

I buy property for 70-80k usually min 3 bed pos 4, i convert into 5 bed usually 1 downstairs what was the lounge, i make 1500 gross minimum if all 5 are on DSS and profit £1000 minimum per month. Try that if demand in your area.

I couldnt pick up a property that size in my area unfortunatley but thanks for your help mate.

GDB2222 wrote: »

You calculate the yield based on what you paid.

In any case, it makes no sense (to me) to say that interest rounds the price up to £100k. That's interest over how long a period?

And you are calculating yield for what purpose?

Thats based over 25 years, how long are BTL usually or what are they advised to be time wise?

slopemaster wrote: »

The way I work it out is YIELD (gross or nett) = rent as a percentage of the property value, so whether it's mortgaged is irrelevant.

But RETURN ON INVESTMENT (which is what I'm more interested in) needs to take the cost of borrowing into account.

But the usual way of accounting for interest is to deduct the cost of an interest-only mortgage from your rental income - rather than adding the cost of the interest to the 'price' of the house

Thanks for your help bud, been helpful just pickled me abit more

HappyMJ

Ymcmatt wrote: »

I couldnt pick up a property that size in my area unfortunatley but thanks for your help mate.



Thats based over 25 years, how long are BTL usually or what are they advised to be time wise?



Thanks for your help bud, been helpful just pickled me abit more

You don't count interest in the yield. The interest is variable and can change at any time. BTL loans are usually interest only (if you have sufficient deposit) and therefore run forever. You would not usually keep a BTL for more than 10 years. It's better to wait until the property has increased in price then sell realize the profit (hopefully paying no or very little capital gains tax) and reinvest in another one or two. If you waited 20 years your capital gains tax may wipe out a lot of the profit and the whole point is to not pay any tax at all.