Is there a yield formula?

Mrs_pbradley936

Is there an official formula for working out the yield of a rental property?

I did try a search and found this http://www.cass.city.ac.uk/refig/papers/DoYieldsReflectPropertyMarketFundamentals.pdf

And basically they give Y= Rent/P x 100

Where Y is Yield and P is Market Value.

However I am using the amount I paid for the property some 10 years ago which is vastly different to the present day market value.

I doubt that it matters for my own use but if I am calculating because I want to increase my mortgage it would matter very much. Which would a bank/lender use?

Jonbvn

The accepted method to calculate the yield is by using the current market value.

Conrad

Lenders use varying methods. Uusally they will want the rent to at least cover the mortgage payment, however care is required as 'mortgage payment' is often defined as that which would apply at standard variable rate.

As for yield in terms of investment performance, it is usually expressed as the % rent produced against value of the asset now.

Example a £100,000 property producing £6000 pa rent has a gorss yield of 6%, however the true yield will be less once ongoing costs are factored in such as maintainence, accountancy, loss of interest on deposit and so on.

For this reason some investors, myself included, deem UK property to be a poor investment as I can get the same yield from a no hassle risk free Bank account!

In Germany and other places I get over 20% yield from property.

RabbitMad

Any mortgage company in the current climate are going to want the rent to cover the mortgage and some. I would expect that they might say that 75% of the gross rent is all they would consider.

Personally I think you need to factor in capital growth / depreciation into any yield equations. I sold my rental property last year (having only been renting it for 9 months) and was acheiving only a 4.3% gross yield based on the formula you give before agency fees, insurance and maintainence. Factor in capital growth and that yield rises to 13%.

Vincenzo

If you factor in capital growth, you are referring to the 'total return'.

Going back to the OP, I was not aware that yields came into it with BTL mortgages. It is the rental coverage that lenders look at.

When looking to buy I would use a net initial yield. This is the same as the OP's formula except you add purchasers costs to the market value before doing the calculation. Although this is more appropriate to commercial property where the tenant is responsible for maintenance costs. I would want to see a higher initial yield on residential to reflect the costs of maintaining the property over the years.

If you look at yields in isolation it is hard to justify investment in UK property at the moment. Low yields typically reflected the low risk of an investment and the expectation of rental growth and/or capital growth. In more recent years this has been skewed by the weight of money in the market and over-optimistic sentiment.

Mrs_pbradley936

The mortgage is on my own home and the loan to value for that is very low house worth over £500K borrowed £150K for 2 flats 12 years ago. Now that prices are falling I was thinking about buying another property. I have an offset mortgage and am not borrowing 150K when balanced against savings.

RabbitMad

personally I'd be waiting another year or so before even thinking of dipping my toes back in the BTL market, however provided you can pay your mortgage off I don't think your bank will turn you down and they will probably take into account the rent you receive on all three properties.