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How to calculate a property rental yield
1 - Theory
Calculating property investments rental yield can be confusing
for us at the best of times. There are so many different theories on
investments and what kind of returns you should be getting from your
rent. They vary from calculating deposits into a property, and monthly
returns, or just monthly mortgage payments offset against rental income.
Some investors have interest only mortgages, and some do repayment,
this can also vary the calculations.
Mostly people calculate property investing in a Yield format, taking
the amount of money paid out on an investment, i.e. the monthly mortgage
payment, and then taking away how much profit they make on the money
they have paid into it, using the rental income after costs to get this
figure. Once they have this figure they work out a percentage of what
was paid in, to what they gained as profit, and this will be their rental
yield.
2- Area Variations
All across the UK we have varying property prices. In the South
we tend to have higher purchase prices than the North. At the same time
the rents are higher in the South also. Although the rents are higher
in the South, they do not always compare favourably against the mortgage
payments.
Lets compare 2 typical examples, based on some property I have looked
at in the past.
2 Bed house in Manchester.
May cost £40,000 to purchase, leaving you a £34,000 mortgage after paying
in your 15% deposit, monthly payments of approximate£140. Rent could be
around £350 a month, leaving you around £175 profit after agent fees
of 10%.
2 Bed house in East London
May cost around £140,000, leaving you a £119,000 mortgage with mortgage
payments of around £495 per month. Rent could be around £600 per month,
and after agent fees of around 15% you would be looking at a profit
of about £15.
3 - Equity V Cashflow
So look at both of the above investments again.
The Manchester property has about £6000 tied up in it as equity, this
was placed as a deposit as lenders will give you around 85% loan. It
is making a positive monthly cashflow of around £175. The East London
property has £21,000 tied up in it, and is making less profit per month,
around £15 if your lucky, although it may have a slightly better chance
of growth being in the South. This essentially means that the Manchester
property has a higher return on the money put into it as equity, and
is giving a much better cashflow. Its chances of growth may not be quite
as high, but there is certainly the potential for the North to catch
up with the South eventually. If you were to take the £21,000 out of
the East London property, selling it, you may even consider to buy 3
of the Manchester style property, and aim to achieve £525 positive cashflow
per month.
4 - Other Theories
Rule of 12. One theory I have read on a discussion forum recently
is the rule of 12. Basically advising you to knock of the last two zeros
from the end of the purchase price, giving you your supposed rental
figure. So take a property on the market for about £100,000, knock off
the two zeros leaving you a rental income of £1000 pcm. I find this
to be far to generic, as we all live in different areas, and have different
ratios to what rents you can get for the type of property you buy.
Rental Growth. Some other theories out in the property world don't seem
to stack up in all areas and regions either. Take the fact that rents
are supposed to rise with salary increases. They don't always keep up,
as rent prices really follow the demand factor. If there are lots of
properties available then your rental price may drop, if there are few,
it may rise.
5 - Personal Preferences
Property investing is all down to personal preferences and affordability.
If you only have £6000 as a deposit, you may have to look at a property
in the £30,000 - £40,000 price range. If you have say £50,000 you may
be able to afford something in a higher bracket. What you need to remember
in all seriousness is to look for high rental demand and a comfortable
return, nothing else. You don't want to be responsible for bringing
down rents in an area you have just bought, damaging both yours and
fellow investors nest eggs. Ignore theories, they will have you running
in circles, and you may even end up turning down a good investment,
just because someone else said it wasn't for them.
