When investing in property you should always look at the Return On Investment (ROI), as you are buying the property to make money. Therefore you need to calculate the rental yield to ensure that the property that you are interested in will make you the most money on your investment. Yield uses the rental income over the initial cost of buying the property and it is expressed as a percentage. There are several ways of calculating yield, but for buy to let (BTL) we will use the most common one known as rental yield. This is calculated by the rent minus the running costs and dividing it by the total amount invested to purchase the property. This will give you a percentage, the higher the percentage the better the deal.

So our formula would look like this:

 

Yield = (((Monthly Rental – Running Costs) *12) / Investment)*100

 

Let us do a simple worked example:

Suppose that you have found a couple of potential properties that you are interested in but now you have to decide which one to choose. Property one costs £175,000 with a potential rental of £650 per month. Property two costs £200,000 with a potential income of £800 per month.

 

Property 1.

Monthly Rental Return = £650

Investment = £175,000

£650*12 = £7,800 (Annual Rent)

£7,800/£175,000 = 0.044

0.044*100 = 4.4% Yield

Property 2.

Monthly Rental Return = £800

Investment = £200,000

£800*12 = £9,600 (Annual Rent)

£9,600/£200,000 = 0.048

0.048*100 = 4.8% Yield

 

Although property two costs more to purchase it gives a higher yield, therefore a better return on investment.

 

The above examples is a simplistic version, as it does not include things like voids which can skew your calculations, so you may want to stress test the calculations by using a figure of 10 months annual rent instead of 12 months. You also have to obtain accurate information which includes the following:

1. Cost of property
2. Stamp Duty
3. Mortgage
4. Mortgage arrangement fees
5. Building Insurance
6. Survey Fees
7. Legal fees
8. Tenant acquisition fees
9. Refurbishment costs
10. Maintenance Fees
11. Voids running costs (Council Tax, Utilities etc.)

There may be other items that you need to add to the above list e.g. for HMO you may need to include a licence fee and furniture, so do your due diligence and be as accurate as possible.

 

Be wary of yield figures that are given by agents and developers as they are often based on the basic cost of the property so that it makes the deal look more attractive. So do not be afraid to ask questions and ask how they have come up with their figure and use your list as a checklist to help you. Also, do your own due diligence and do a comparable check of local property prices within a ¼ of a mile of the property that you are interested in and what they sold for and also do a similar local search for the rentals in the area.