calculating yield

[adonaghy]

Ive seen a three bed semi in a great area and loads of kerb appeal. It will cost me 135k (10k off home report) and I expect it to fetch around £650 pcm. Im buying it as a pension plan, but it will eventually house me when I downsize in 10 yrs so yield not all important.

Can anyone work out yield and tell me how calculaton is done,

thanks

Ann

[Melboy]

Yield Formulae.

Annual rental Income divided by purchase costs x 100

650 x 12 = £7800

divided by £135,000 = 5777

x 100 = 5.7%

[Grampa]

Annual rental income - outgoings/expenses divide by sale price X 100 = % yield

It is important to calculate all the outgoings/expenses otherwise you will not get a true yield. Never believe the estate agents figure because they will leave out lettings agents fees and gas cert costs etc to make the yield appear better.

Outgoings/expenses

Agent fees

gas certs

elecy certs

insurance

service charge

ground rent

bank charges

maintenance budget & maintenance contracts

empty period (3/4 weeks per year)

Travelling expenses

stationary

I have probably left a few out and some would even calculate the legal costs of purchase into the first year.

[Richlist]

Oh dear....where to start.

There are many different ways of calculating a yield figure....nearly all of them are WORTHLESS.

If you are going to pick a method and arrive at a stand alone figure it will be worthless. If you are going to compare with someone elses property/ yield you will need to know exactly how they calculated their figures or the result will be worthless.

Much better to calculate the expected 'return on capital invested' which will vary year on year.

Most people who calculate yield conveniently forget to include provision for furniture replacement, bad debt, redecoration etc.

[Grampa]

The basic calculation that Melboy has stated is a good starting point (as long as service charges are included) when you are trawling rightmove/zoopla and looking and comparing properties.

But you need to add all the extra outgoings to firm it up before committing yourself.

I wound a few estate agents up recently when looking at properties when I asked "how exactly did you work out the yield?". Then followed it up with "well that's misleading as it is not a correct calculation"

[Richlist]

The basic calculation that Melboy has stated is a good starting point (as long as service charges are included) when you are trawling rightmove/zoopla and looking and comparing properties.

I think we need to have a serious discussion about this as there seems to be a lot of confusion and misunderstanding amongst forum members.

Why only service charges ?

Why not also include ground rents, permission to let fees, legal fees associated with the letting etc etc ?

[Melboy]

'twas only the basic yield formulae but of course there are many factors to be considered when calculating the true yield costings and as mentioned many LA's and EA's conveniently forget to mention this in their selling adverts.

Having just refurbed my flat there will be no seeable income from the rent for 6 months due to costs of refubishment but that is the name of the game and the OP did say that she was in for the long term investment of what she planned to buy.

Wise heads on here already know that returns of 6% probably are shielded from the true return rate.

[Richlist]

If there is one subject that I have read more rubbish about than anything else its yields on BTL property.

I don't remember the exact figures but the Sarah Beeney books talked of never buying BTL unless there was something like a 15% yield. The 'Buy to Let Bible' ( the most rubbish book I ever read) quoted acceptable BTL yields of around 20-25%. What planet are these people on ?

Yields mean nothing.....they aren't even a reasonable comparitor.

If you were to put your money into vituallly anything other than BTL you would want to know the return you were going to get......yields won't tell you that.

[Melboy]

I have never ever thought about " yields " in all my property buying in fact, it was only recently that I gave it any thought really out of casual interest.

I am probably more interested in growth in property value than any yields. When you think about yield it is a ficticious value.

[Grampa]

Why only service charges ?

Why not also include ground rents, permission to let fees, legal fees associated with the letting etc etc ?

Because it (service charge) is probably one of the largest extra outgoings and can quickly be added in to the calculation and if the yield is on the low side with that why bother spending time totalling and working out all the others into the calculation at this stage.

At mentioned earlier it is a "starting point" and "you need to add all the extra outgoings to firm it up before committing yourself."

[Grampa]

I am probably more interested in growth in property value than any yields. When you think about yield it is a ficticious value.

When buying now I think you have to consider both nowadays as it is tougher to make growth in property value alone. A good yield alone isn't good enough you have to also factor in your "exit strategy" to use a RL phrase.

[Richlist]

I agree. When I started letting residential property in 1999 it was all about capital growth. Property prices were rising fast and the annual increase in capital value far outstripped the annual rental income.

Today its a different world. Increases in capital values are restricted to a few hot spots with many areas static and some falling. Its at these times that rental income and the profit arising from it is virtually all you are going to get.