Calculating yield on a property

[Adrian123]

I have a beginner question for some of you experts here. I am looking to get into the buy to let market.

How does one calculate the yield on a property?

Is it strictly the (rental income-expenses)/price of property x 100?

Do you include your mortgage and/or carrying costs in your expenses?

What if you put down only 50,000 for example for a property that costs 300,000. Do you calculate the yield based on the actual price or just your down payment?

Thanks!

 

[QCStone]

example:
200k Capital Introduced (CI)

1000 PCM Return on Capital Employed (ROCE)

Take the annual Rental figure of 1000 times 12 months = 12,000

Divide the annual rental income against Capital Introduced

Voila

6%

 

[Adrian123]

example:
200k Capital Introduced (CI)

1000 PCM Return on Capital Employed (ROCE)

Take the annual Rental figure of 1000 times 12 months = 12,000

Divide the annual rental income against Capital Introduced

Voila

6%

Thanks. But what about expenses, such as property taxes or any maintenance charges? Should they not be factored in?

Also, at what yield does the property become an attractive buy?

 

[The Soup Dragon]

Adrian. Most of the time you see yields quoted it will be as QCStone has suggested. Of course, you know there are expenses and these reduce the true yield for you as an investor. Once you have your Buy 2 Let property you will regulalry review your investment. A simple calculation of yield than can be used is:

Annual income less all annual expenses.
Estimated value of property now (not the price you paid.)

This will show you how your investment is performing and if its paying for itself. So if your yield is falling (this happens) and you think cpaitla appreciation isn't going to be strong, then its time to offload.

Ascertaining what yield would make an attractive buy is a trickier question. Clearly the higher the better - everything else being equal. But there lies the problem. Everything else isn't always equal. Yield is correlated to location and some locations will fair better than others for capital appreciation. Take 7% yeilds in the UK as an example. This sounds like a good yield as it should cover your expenses. But chances are you will only get this in areas you wouldn't chose to live. Many of these areas have been among the last to see strong house price inflation (buyers looked there when they couldn't afford elsewhere.) I imagine these areas will be among the first to depreciate in value if there's a downturn in the market.