The Mystery of the Investment Yield
Even if you are a new property investor you will have no doubt come across articles that have mentioned about the mythical concept of the investment yield. The journalist will then no doubt try to confuse you further by going on to quote a few random numbers such as 6 or 10%.
My experience of the Property Investment Yield
I remember at university pouring through copies of the Estates Gazette to try and decipher the auction results. Like surveying hieroglyphics there were a whole series of unintelligible abbreviations. It felt like if I could crack this strange code of the property investment yield then not only would I be able to speak a whole new language to impress my friends down the pub with, but also if I could crack the mystery of the yield I would ascertain the rank of property knight. Thereby collecting the obligatory white charger, princess and castle and also along the way putting myself on the path to property wealth and freedom.
So what is the investment yield?
The investment yield isn’t actually that difficult to understand. No need to consult Merlin on this one. The yield simply refers to the relationship between the capital value of a property and the actual or potential rent that it generates.
Yields are a very important measure for investment properties as they measure the ratio between the cost of acquiring the asset and the rent that they produce. They can be used to assess whether property is historically expensive and also they provide an indication of the cost of the asset in relation to other investments. The term property investment yield in it’s simplest form is often interchangeable with the concept of rental yields.
Simple property investment yield calculations
In the same way a building society deposit account of £100 that pays £5 interest in a year would yield 5% of interest. A property rented out for a year that generates £5000 rental income and has a capital value of £100000 would also yield 5%.
Rental yields vary across the country with the highest being found in the northwest and the lowest in central London reflecting the very high cost of property. Rising yields can indicate a situation of falling capital values or rising rents or a combination of both. Yields are typically given gross; that is with no deductions from the rent.
Net rental yields are some times referred to but more as an illustration of any rental surplus than as a standard form of measurement. A net yield is the yield resulting from gross rent minus the costs of maintenance and collection of rent (e.g. management fees) and are typically 1.5% – 2% below the gross figure when an agent is used.
What yields should I be expecting?
This largely depends on the area that you buy in and the type of investment property you purchase. I will go on to explore what the latest data on residential rental yields are across the country and have a look at how they compare to other types of property and investments in future articles. So make sure you keep on tuning in or join our discussion on what yields you are getting in the Property Hawk blog.