How to calculate property yields and return on investment
Knowing exactly how much profit a commercial property will bring you is a vital component of the buying decision. We look at how you can calculate the yield and return on investment (ROI) so you can make an informed choice.
What is rental yield?
There are two forms of rental yield: gross yield which omits costs and expenses, and net yield which omits figures such as interest rates, maintenance costs and periods when your property may be vacant.
Rental yield is a method of calculating the ROI on your commercial property using how much rental income the property is likely to bring, over the true cost of purchasing the property. If you’re considering a Buy-to-Let property the yield means how much annual income it will generate as a percentage of the value of the property.
By using rental yield as a yardstick you can compare different properties before you buy in order to compare how much return you’re likely to make.
Making a calculation
Calculating the gross yield: the gross yield simply means how much ROI you will make before any expenses are deducted. It’s calculated by this simple formula:
Annual rent ÷ property value x 100
So, if the annual rent you expect to make on a property is
12 x £892 pcm (the UK average as of January 2017) = £10,704
And that figure is then divided by £216,750 (the average cost of a house in the UK as of September 2016) x 100 the gross yield will be 4.9%.
Calculating the net yield: the net yield will give you a figure for the ROI after you have deducted your expenses. You can calculate it like this:
Annual rent (using the same figures as above) = £10,704 – operational costs (purchase price, transaction costs, letting fees, maintenance and repair costs, mortgage interest and insurance etc) = £8,359 (average as of April 2015) ÷ property value (£216,750) x 100, the net yield will be 1%.
Clearly, the higher the percentage, the better, and please bear in mind that these calculations are based on the UK average – in your specific location and in your own individual circumstances, the figures will inevitably work out differently. Experts suggest that any figure above 7% (net yield) is a healthy ROI.
If you need advice on any aspect of purchasing a commercial property or are concerned that your current property is not delivering on its ROI potential talk to a member of our team. We can offer professional, current advice on getting better value from your mortgage as well as rental management services among other things.
Written by: John Padgett on Tuesday 25/04/2017