An essential skill of any property investor is knowing how to calculate property yield. The first thing you need to understand when dealing with investment property is that there are two types of yield that you need to know about. They are “gross yield” and “net yield.”
It is crucial that you understand the difference between Net and Gross Yields.
There are other types of yield that can be applied, but these two types are the main ones you need to know about to see if a rental property will be profitable or not. These are the base, get these wrong and your other calculations might fall apart.
Let’s Begin with Gross Yield.
Gross yield is calculated by dividing the properties annual rent by the property value. This is then expressed as a percentage, as below.
Gross yield = Annual Rent / Property Value
For instance: if a properties annual rent is £5,000 and the value of the property is £100,000 then the gross yield is £5,000 / £100,000 which equals 0.05, which is equivalent to 5%.
Therefore the gross yield = 5%
Most professional property investors will take net yield a lot more seriously than gross yield, when they are doing their research and need to calculate property yield.
The reason for this is simple. Net yield also takes into account all the operational costs. Therefore it is much more reliable at making a true assessment as to whether a project is profitable or not.
Net yield is calculated by taking away the properties annual operational costs from its annual rent. You then divide this figure by the property value, as below:
Net Yield = Annual rent – Annual Costs / Property Value
For instance: If the annual rent for a property is £5,000 and it’s operating costs per year i.e. insurance, maintenance etc. are £400, and if the property value is £100,000, then the following expressed as a percentage, would be true.
Net Yield = £5,000 – £400 = £4,600 / £100,000 = 0.046 which equivalent to 4.6%
Net yield as a percentage = 4.6%
Learning how to calculate property yield is paramount to your property investing success. This is because you need to know if someone is quoting a figure to you that is gross yield or net yield. If they are quoting a gross yield figure and you think it is net, then you could be buying a property that is making a loss not a profit.
Many novice property investors fail at the first hurdle, just because they didn’t know the fundamental difference between gross yield and net yield.**Nothing on this website should be confused with financial or legal advice. If you need this, or any other type of advice, please seek the help of a competent professional. In addition, because real estate laws change all the time and differ from state to state, and even city to city in the same state, everything in these pages should be considered general marketing advice and ideas. Please see link to full Disclaimer at the bottom of this page.