How to calculate rental yield is a fundamental skill that is a requirement for any property investment. There are two fundamental forms of yield you need to be aware of when investing in property. One is gross yield and the other is net yield. There are many other type of yield that can be applied but these two are the two that most property investors are interested in. If you can understand the meaning of these two types of yield and know how to apply them, then you have the beginning of knowing how to work out if a particular property investment is going to be profitable for you are not.
a) Gross yield
Property
This is calculated by dividing the annual rent by the property value and is expressed as a percentage, as below:
Gross Yield = Annual Rent / Property Value
For example: if the annual rent is £5,000 and the property value is £100,000 then the gross yield is £5,000 / £100,000 = 0.05, which is equivalent to 5 %.
Gross yield = 5%
b) Net yield
Net yield rather than gross tends to be what most professional property investors would use to calculate the profitability of a project. The reason for this is that it takes into account all operating costs.
Net yield is calculated by taking away the annual costs from the annual rent, and then dividing this figure by the property value, as below:
Net Yield = Annual rent - Annual Costs / Property Value
For example: annual rent is £5,000 and operating costs for the year, i.e. maintenance insurance etc., are £400. If the value of the property is £100,000, the sum would then be expressed as a percentage as follows:
Net Yield = £5,000 - £400 = £4,600 / £100,000 = 0.046 which is the equivalent to 4.6%
Net Yield = 4.6%
It is imperative if you are talking to someone selling you a property and they say it has a certain yield that you know whether it is a gross yield or a net yield, because we could be talking about a huge difference. And it could be the difference between it being a good deal and a deal which you should stay well clear of.
Many budding property investors fail at the first huddle, simply because they didn't understand the difference between gross yield and net yield. For people who want to succeed at property investing long term, understanding these two fully and perhaps more importantly, understanding the difference between the two, is a skill that will help them succeed not just today but in the long run as well.
How To Calculate Property Yields
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