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Understanding and calculating yields

By Andy Thurston


With the world of property finance there are so many different calculations that are used when considering a project. Within this blog I have tried to explain what yield is and how you calculate it.

The yield of a property is a measure that many property investors use to consider the annual return that is likely to be achieved from an investment. The yield is calculated by reflecting the annual rental income as a percentage against how much the property cost.

To calculate the yield of a property simply divide the annual rental income by the cost of the property and then multiply by 100.

Example


A 3-bedroom semi-detached house purchased for £415,000 which is then let on a standard AST to a family for £1,500 per month (£18,000 annually).

18,000 / 415,000 = 0.04337 x 100 = 4.34%

The gross yield of the property is therefore 4.34%. Note - this is a gross estimate as it doesn’t take into account all costs (stamp duty, solicitor fees, valuation fees etc.) but can still be useful to compare against similar properties in the area.

To calculate a net yield an investor would need to deduct various costs from the annual rental income such as mortgage payments, utility charges, maintenance costs etc. This would then produce a net yield.

There are two main variables which will impact the yield – the annual rental income and the value of the investment, a change to either will change the yield.

Using the above example, if the investor was able to increase the rental income to £1,800 per month but the value remained static this in turn would see the yield increase to 5.20%.

Alternatively, if the cost of the property increased to £455,000 (after completing an extension for example) but the rental income remained at £1,500 per month the yield would reduce slightly to 3.96%.

Yields vary depending on asset class (residential and commercial) and location, different commercial use classes will also have different yields. Some of the large property companies (Knight Frank, Savills etc.) will provide regular market reports which provide up to date yield guides which are useful market information.



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