What does 'Yield' mean when buying a property?
Find out what Yield means when you are buying a property. 'What does Yield mean?' plus over 150 other property related terms and jargon in plain English
Yield
The yield of a property is often used when buy-to-let investors are considering the purchase price of a property versus how much they might be able to rent it out for. They can then decide if they believe their funds may perform better elsewhere, such as in a savings account.Yield is defined as ([[Rental Income for one year] / [purchase price] * 100.
So if I am looking at a property for sale at £250,000 and similar properties in the area are renting for £1500 per month my calculation would be:
([[1500 * 12] / [250000] * 100 = 7% Yield.
Of course this isn't a realistic figure, you won't get to keep all of that rental income because there will be maintenance on the property and you may have fees such as a service charge from the Managing Agents.
To learn all the lingo you'll need to purchase a property the smart way pick up a copy of my ebook How to Really Buy a Property.
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Chapter 8:
Buying to Let / For an Investment
"... willing to show you how they did it in the past, most are simply telling you their 'lucky' story with the benefit of hindsight.
- The Income Stream - yield -
The traditional way to see if a property will give you a good income stream is to measure the yield or return. This is a percentage..."
"... The traditional way to see if a property will give you a good income stream is to measure the yield or return. This is a percentage figure which will help you decide if, assuming the property price does not go up, your money would be better off there or in the bank. The calculation is as follows:
..."
"... not go up, your money would be better off there or in the bank. The calculation is as follows:
Total rental income for the year
x 100 = yield
Purchase price
So if you were looking at a property that would cost £250,000 and the rent that it would achieve would be..."
"... income for the year
x 100 = yield
Purchase price
So if you were looking at a property that would cost £250,000 and the rent that it would achieve would be £1,300 per month the calculation for yield would be
£15,600
x 100 = 6.24%
£250,000
yield is a..."
"... yield is a quick calculation to consider if your money is could make you more in another investment and, if you meet a regular investor out buying you will often see them staring into the air while they work out this calculation and decide what offer they want to put forward.
..."
"... to put forward.
Remember also that the yield Calculation does not take into account the costs of Ground Rent and Service Charges on Leasehold properties. This is often overlooked but a £4,000 annual service charge on the example above reduces its yield by nearly 2%!
When calculating..."
"... but a £4,000 annual service charge on the example above reduces its yield by nearly 2%!
When calculating yield remember to include all the costs that will need to be covered, not just the mortgage
Properties that tend to offer the best yields are those not popular with private buyers...."
"... that tend to offer the best yields are those not popular with private buyers. They are the ones that front on to busy roads, back on to railways, sit above commercial premises, are ex local authority, etc. The yield is good because the purchase price is lower for one or more reasons which has removed a large sector of private buyers as likely contenders. Tenants, however, only see a property as temporary and so are more relaxed about taking a view on living in a property that has a negative..."
"... to sell you are also going to achieve a lower price than a comparative property in the same area that has no draw backs.
- Killing the yield and Making a Loss -
Most investors are smart enough, when calculating profit, to take into account expenses such as service charges and the fees of..."
"... houses maintenance is far more substantial and it is here that the novice investor can make mistakes because houses often appear to have a better yield. On first inspection there is no service charge or ground rent to pay and so the rental profit appears much better. But it is essential to remember that the costs of roof and window repairs or replacements, as two examples, can be..."
"... yield is a fair one off piece of maths, prices will rise and so capital appreciation also needs to be taken into account. Many speculative investors for example, will accept a two or three percent yield on properties that they believe will rise thirty percent in value over the next two..."
"... it is worth accepting a low yield if you are of the belief that an area is likely to rise in value. If the negative aspect is, for example, that the property is next to a run down high rise council block it is fairly safe to assume that the block will be demolished at some point. The cost of maintaining such buildings constructed during the sixties is becoming prohibitive and local authorities are increasingly opting to remove these in favour of low rise schemes. But when that 'some point' occurs is pure speculation so you have to be prepared to take a risk and have funds that you can invest in the long term for such..."
"... you end up caught in this situation there will also be a second headache. Chances are you are not the only investor who cannot sell to recoup their funds, you are amoung a number of buyers who will be looking to rent out their apartments which temporarily floods the market, driving down the rental yield to a point where you may actually end up having to cover some of the mortgage payments or other costs from your own..."
"... they bought large volumes from this builder'.
The rental figures on paper offered a 10% yield and there was plenty of blurb to explain why tenants would snap up such flats and why the capital gain would be excellent over the coming years.
They would organise the mortgage and even work..."
"... investment company blamed an unusual and unexpected number of properties on the market to rent was the reason he could not now get the yield they had promised in their literature and that there had been a temporary dip in the areas prices which they could not have foreseen. There was nothing in his contract with them that guaranteed anything within the sales brochures so there was nothing he could..."
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