How to calculate a rental yied

23/04/2014

Today I am going to discuss how to calculate your yield when investing in a buy to let property.  The yield, put simply is your profit, which after all is what you are doing this for.  It can be easy to lose sight of this important factor when you get involved in the excitement of a new purchase.

The standard way to calculate a rental yield is simply to take the price of the property and its annual rental return and work out the percentage of the return against the cost.  This is a good rule of thumb to use to compare different properties when you are buying.

For example    Property value  £100,000  rental achieved over 1 year  £6000.00  yield = 6%

 (6000/100,000 x 100)

However,  this is far too simplistic so when you have sourced your ideal property you will need to work out the return as it applies to your personal situation.   Every investor will have a different calculation for the same property based on their individual costs.  I prefer to look at the yield on my investment so, for example, using the same figures as above, but assuming that I put down £25000 as a deposit and borrow £75000, the yield will look something like this:

Rental achieved    £6000

Mortgage* cost on £75000   (£352 per month so £4224 per year) 

Profit on rental achieved is £1776

2310/25000x100= 7.1%

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Of course what the above example also shows is that it is more sensible to arrange your borrowing to maximise your return instead of by what cash you have available. Put another way, if you have £50,000 available is it better to put it all into the one property at £100,000 and maintain a £50,000 mortgage or buy two properties each with a £75,000 mortgage?

Using the same figures as above two properties would return £1776x2 = £3552

One property with a £50,000 mortgage would return £6000.00 rent less mortgage** costs of £2700 profit = £3300 some 7% less!  This is called leveraging your capital and is a good way to maximise your returns.

There are other costs involved in all the examples above such as agent fees, maintenance etc. which would have to be factored in in order to get a sensible  answer . These I have ignored for the time being  but will  cover in a future article.

I am always available to discuss any potential purchase with anybody who is interested so if you are thinking of investing in the market in Weymouth, Dorchester and the surrounding areas drop in for a chat and we can crunch some numbers together.   Our offices are at the top of St Thomas Street in Weymouth.

By the way (small plug here) Martin and Co, Weymouth has an excellent mortgage service available, a no fees whole of market broker. Somewhat a rarity these days!  If you would like details please call 01305 775504 or email

Philip.wakefield@martinco.com  

  

*mortgage costs calculated using a TMW 2.89% Tracker currently available on interest only costing £352 per month

**mortgage calculated using TMW BTL Tracker product at 2.49% currently available costing £225 per month interest only