- Property
- Letting
- Agents
Cardiff Property yield and returns
As a property investor you will often hear the words yield and returns being thrown around but what do these actually mean, and how can you work them out?
What it really comes down to is; how much money have you put into the property, and how much money will you get back out. Yield just shows your return as a percentage of what you put in which is, Yield is "the annual rent divided by the purchase price, made into a percentage".
To give an example to work out your yield:
If your rental income was £1,000 this would give you £12,000 income in rent. If you bought the property for £200,000 then it is simply: £12,000 divided by £200,000 multiplied by 100 = 6%
However, what is important to realise is that the above calculation assumes that there is no mortgage, and that there are no costs, which is probably incorrect! If you do not have a mortgage yet, then the BBC have an easy to use online mortgage calculator, otherwise you can take your figure from you mortgage statement.
It is important to note if you are using a repayment figure or an interest only figure. Most investors will use an interest only mortgage, and for the purposes of working out your yield, we will do the same.
A £200,000 Buy To Let Mortgage, at 80% Loan to Value will require a mortgage of £160,000, and therefore a deposit of £40,000.
On top of the deposit, there are other costs such as solicitor costs etc. For this example we will allow £1,000
At 5.5% over a standard term of 25 years, the interest only repayments will be £733.
Therefore, the gross profit per month will be: £1,000 (the rent) minus £733 (the mortgage) = £267 gross profit per month.
Therefore, per annum: £3,204 gross profit
To work out our yield:
The annual rent divided by our costs (deposit + other costs), made into a percentage.
As per the example above: £3,204 divided by £41,000 multiplied by 100 = 7.81%
As you can see, it is more effective to borrow money, on the right terms than to buy properties outright. With £200,000, in this example the property investor would be able to buy one £200,000 house outright, or nearly five on an 80% BTL mortgage.
The outright owned house would bring in £12,000 per annum in gross profit, whilst five Buy To Let houses would bring in £16,020 per annum in gross profit.