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Property investing and developing is fun but we are all in it for one thing right? Yes, money.

Yet is still surprises me how many people we speak to who haven’t worked out their gross yield, net yield and total Return On Investment.

Not all property deals are a good investment and many people have got away with buying turkeys because the market has been kind.

But the market isn’t always kind.

So it pays to know what a property deal is worth to you.

So here’s our quick guide to working out your gross yield, net yield and ROI.

Calculating Gross Yield

Gross yield is the total annual income that your property will make you divided by its purchase price.

This is good place to start to quickly work out if a property deal deserves a closer look.

It’s also handy for quickly comparing with other deals.

However because it doesn’t take costs into account it isn’t a good idea to base your business plan or decisions on this figure.

Here’s a quick example or working out gross yield.

Imagine we can get £600 a month rent on a house that is for sale at £150,000.

Total annual rent = £600 x 12 = £7,200
Purchase Price = £150,000
Gross Yield = 7,200 divided by 150,000 x 100 = 4.8%

Calculating Net Yield

Net yield gives a better idea of the true return a property can give us because it takes costs into account.

  • Costs can include:
  • Finance repayments
  • Maintenance
  • Management Fees
  • Allowance for empty periods
  • And so on..

So this time we work out our annual income minus the costs to get more accurate yield.

Using the example above

Imagine we can get £600 a month rent on a house that is for sale at £150,000 and the annual costs are £2000

Total annual rent = £600 x 12 = £7,200
Income minus costs = £7,200 – £2,000 = £5,200
Purchase Price = £150,000
Net Yield = 5,200 divided by 150,000 x 100 = 3.5%

Calculating return on investment (ROI)

Of course these figures only matter if you are putting 100% cash into your purchase.

More often than not you will be using a mortgage or some other form of finance.

This is where ROI comes in.

To work out ROI we take our annual profit after costs and divide it by the amount of actual cash you put in.

So here we go again:-

Annual income (rent) = £7,200
Annual costs = £2,000
Annual Profit = £5,200
Purchase Price = £150,000
Mortgage (75%) = £112,500
Cash invested (25% deposit) = £37,500

To work out ROI we divide £5,200 by £37,500 x 100 = 13.7% ROI

ROI is the most useful figure and the one you should concentrate on when putting together a cost plan for any property purchase.

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If you would like any help sourcing properties or finance to fund a property project, drop us a line for an informal chat on 0161 913 2780 or email us here

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