Buy to Let Yields – what are they and how do I calculate them!?
When considering buy to let property as an investment the yield is something very important.
It is used as a measure of whether a property is a good or bad investment, you can compare areas based on their average yields and you can look at how your portfolio is performing by looking at your yields.
I recently wrote a blog on the best area in Manchester for buy to let and why Manchester is such a favourable investment area and shared some comparable yield figures for the UK, which may be of interest if you are considering your next investment.
Now for the sums, here’s a quick comparison
Let’s take a house price of £100,000 and rent of £500 per month for the sake of these sums.
In this instance we will do a simple calculation for a quick yield comparison, so there will be no consideration of the full purchase costs or running costs, just purchase price and rent.
Rent (£500pcm x 12 = £6000pa) / House Price £100,000 = 0.6 x 100 = 6% Gross Yield.
Take a more detailed look at calculating yields
What matters fundamentally is how much of your own money you are actually spending, i.e. a cash purchase or cash deposit with a buy-to-let mortgage. The two most common errors are investors adding in the whole purchase price when they shouldn’t, or leaving costs out that are essential to achieve an accurate yield.
Calculating buy to let yield on a cash purchase
Firstly calculate the Gross Purchase Costs, combine capital costs including the cash purchase price.
For the Net Rent, take the rent and subtract all running costs. e.g. The Gross Purchase Costs is: (Purchase Price + Legal Fees, Surveys, Refurb Costs.)
The Net Rent is: (Expected Annual Rent – Agent Fees, Property Insurance, Annual Safety Checks.)
To complete the Rental Yield calculation: (Net Rent / Gross Purchase Costs X 100 = % Rental Yield Gross before tax.)
Cash deposit with a buy-to-let mortgage
The key point to focus on with an investment is the amount of money you actually pay out of your own pocket to achieve the return i.e. the rental income or capital growth. When you are using an interest only Buy-to-let Mortgage the only part of the Purchase Price you must include is your cash deposit.
Because the yield should only be based on the money you actually spend i.e. the deposit, as the cost of the mortgage will be funded out of rent.
e.g. The Gross Purchase Costs is: (Your Cash Deposit + Legal Fees, Surveys, Refurb Costs.)
The Net Rent is: (Expected Annual Rent – Buy-to-let Mortgage interest payments, Agent Fees, Property Insurance, Annual Safety Checks.)
To complete the Rental Yield calculation it’s the same: (Net Rent / Gross Purchase Costs X 100 = % Rental Yield Gross before tax.)
Why the confusion
Whilst the basic calculation is the same, some figures used within the calculation are different.
Using an interest only Buy-to-let Mortgage gives you leverage on your investment however it’s a Red-Herring to include the full Purchase Price, only the Cash Deposit part should be included.
Please remember that there is always the probability of maintenance costs to be deducted from the annual rent to calculate Net Rent, however there’s no way of knowing in advance what might go wrong on a property throughout the rental year, you can only assume some contingency.
From my experience if you allowed £1000 per year across a property you will be about right over, some years maybe more, when boilers or roofs are involved.
I hope this has been useful, if you would like to talk about any specific investment opportunities that you are looking at that I would love to hear from you.
You can contact me via the website here or call the office on 0161 883 2525.