What is the Yield of a Buy to Let Property Investment?
Saturday 8th July 2023
What is Yield of a Buy to Let Property Investment?
In buy-to-let property investment, yield refers to the return on investment generated by the investment property. It is a simple financial calculation that indicates the profitability, or otherwise of the investment and is typically expressed as a percentage.
The two common types of yield used in property investment are gross yield and net yield:
Gross Yield:
Gross yield is calculated by dividing the annual rental income generated by the property by its purchase price or current market value, and then multiplying the result by 100.
This calculation indicates the property's income-generating potential before deducting any costs. For example, if a property generates an annual rental income of £9,000 and was purchased for £75,000, the gross yield would be 12% (£9,000 / £75,000) x 100.
Net Yield:
Net yield considers the property's costs and provides a more realistic idea of the actual return on investment. It is calculated by deducting the property's operating costs (such as mortgage interest, repairs and maintenance, letting fees, insurance, landlord licences and taxes) from the annual rental income and then dividing the result by the purchase price or current market value of the property.
For instance, if the same property has annual costs totalling £3,000, the net yield would be 8% (£9,000 - £3,000) / £75,000) x 100.
Yield is an essential consideration for buy-to-let investors as it helps assess the profitability of the investment and compare different properties or investment opportunities.
However, it's important to note that yield alone does not provide a complete picture of an investment's potential and other factors, such as potential capital growth, location, voids, and should also be considered when evaluating a buy-to-let investment.
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