Rental Yield Definition

by Readers Question

22:05 PM, 1st June 2013
About 6 years ago

Rental Yield Definition

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Rental Yield Definition

Rental Yield DefinitionI wonder if someone would be good enough to explain rental yield to me as I want to know I am on a sustainable track.

We have one property which we bought outright for £129000 and we rent this out for £600 pcm.

We then remortgaged another property we owned outright to raise the deposits for 2 more houses.

We used part of this equity as a 35% deposit on a house we paid £140000 for and are renting out for £695 pcm and we are in the process of buying another one with the rest of the equity being used for a 25% deposit.

This house already has an existing tenant who is paying £700 pcm.

That just leaves the property that we remortgaged. We paid £120000 for this house and this is being let at £595 pcm.

We are considering now remortgaging the other property we own outright to raise the deposits to buy 2 more houses but would just like a bit of guidance on rental yields as I am not sure if you use the figure you actually paid for the house or the figure it is mortgaged for.

I would appreciate any advice offered.

Thank you

Ashley Fett



Comments

Mark Alexander

22:20 PM, 1st June 2013
About 6 years ago

Hi Ashley

The simple calculation for rental yield is monthly rent divided by value times by 100. Therefore, in your first example the figures would be £600 X 12 dived by £129,000 X 100 = 5.583%

The above is a calculation of gross rental yield based on purchase price. You can also use the same formula to calculate gross rental yield based on current value.

Some people have a variety of different ways of looking at yield. For example, they divide their net rental returns, after deducting all expenses, by the amount of cash they have in the property. Obviously the returns are infinite if you have managed to refinance all of your deposit out of a deal. This is referred to as net Return On Capital (or cash) Invested, sometimes abbreviated to ROCI

Again ROCI can be based on net cash return based on the original purchase price or current value.

Your other question, referring to whether you are "on track" is a bit more difficult to answer without knowing what your objectives are.

What I would say is that your rental yields are quite low. You may find this thread an interest read as it is very closely related to your question - see >>> http://www.property118.com/my-property-strategy-opinions-please/39958/

Ashleigh

22:47 PM, 1st June 2013
About 6 years ago

Thanks for that Mark. Well it seems all my properties have a yield between 5.5 and 6%. I know you say that seems a bit low so what would you be looking for in an acceptable yield?
We have been quite choosy in the properties we buy and the area they are in and thinking ahead, their resaleability if and when we decide to sell on. I suppose it's trying to weigh up everything to get a good balance of both.
Thanks again
Ashley

Mark Alexander

22:54 PM, 1st June 2013
About 6 years ago

Hi Ashley

There is no right or wrong answer as yield is only part of the equation. For example, many landlords in London are happy to live with with sub 5% yields as their strategy is based on capital growth.

The thing to be very careful about if you go for low yielding properties is not to over-stretch your finances. In other words, don't go for maximum LTV's unless you have another reliable source of surplus income to cover any negative cashflow when interest rates rise and when you have set backs such as bad tenants, voids or unplanned maintenance. Also, make sure you keep a decent amount of cash in reserve.

Vanessa Warwick

11:38 AM, 2nd June 2013
About 6 years ago

Hi Ashley,

Most landlords look at a minimum of 5% yield, but more experienced ones look at 8% plus.

On Property Tribes we have a useful discussion about yield that you may find adds to your knowledge base:

http://www.propertytribes.com/dummies-guide-to-yield-t-6984.html

It's great to buy property by the numbers, as numbers never lie ... *

*Provided that you input the correct information. 🙂

Ashleigh

11:47 AM, 2nd June 2013
About 6 years ago

Thanks for your advice Vanessa, I will certainly read the article on your site. I don't feel so worried now if 5% is a figure most property owners are looking for. We could buy properties in our town which would generate a higher yield but we also look at resale and capital growth potential.
Thanks again
Ashley

Mark Alexander

16:24 PM, 3rd June 2013
About 6 years ago

@Ashley, I have just re-read your question and I think I may have only answered you in part.

You said "I want to know I am on a sustainable track."

You then went on to explain that you are happy with 5% yields and also that you plan to increase your portfolio using 75% financing. Well I'm sorry but the answer to your questions regarding sustainability is NO on that basis. You need to budget somewhere in the region of 25% to 40% of your rental income being required to pay for insurance, management, letting, maintainance, voids etc. On that basis your net yield will be 3% to 4% BEFORE financing costs. On the basis that you will be borrowing 75% this only leaves you with the ability to service interest at 4% to 5.25% in order to break even. Therefore, I conclude that 75% lending is definitely too high if you are going for properties yielding 5%.

Puzzler

16:59 PM, 3rd June 2013
About 6 years ago

Yield is largely dependent on property values and will be lower in the home counties and M4 corridor. Here you would only get 8% on a very ropey property.


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