How To Calculate Buy To Let Yield

How to calculate buy to let yield is one of the most important calculations you’ll need to make if you’re going to be successful in the property letting game. In this post I’ll walk you through 3 of the most useful calculations you’ll need to know.

I’ve heard of a lot of investors who go into purchasing property relatively blind. When I say blind, I mean that they don’t actually know whether or not the property they buy will benefit them financially. Heck, you only need to go and watch an episode of Homes Under The Hammer to see it happens regularly!

Running the numbers is a critical activity for any savvy-investor. What may seem a good deal on the surface may not actually give you what you’re looking for.

How To Calculate Gross Yield

What is Gross Yield?

Gross yield is the most simple of the yield calculations. It essentially takes the cost of the property and compares it to the income you expect to earn from it each year. It is useful to get an initial flavour of a deal, but I certainly wouldn’t advocate using it in isolation as it doesn’t factor in any ongoing costs.

How To Calculate Gross Yield

A Working Example

Let’s say you’ve spotted a property on the market for £120,000. It’s a small two bed house in the Midlands that you think you could rent for about £600 per calendar month.

Annual Rental Income = £7,200, (£600 per month)

Property Purchase Price = £120,000

This would give you a gross yield of 6%.

How To Calculate Net Yield

What Is Net Yield?

Net Yield is a more comprehensive way of looking at what you will get from your property price. The calculation itself is still relatively simple, only this time you deduct any expenses you expect to incur whilst achieving your rental income. This could be things such as: mortgage costs, service charges for apartments or even letting agency fees if you plan on using an agent to source tenants for your property.

How to Calculate Net Yield

A Working Example

Using the example earlier, let’s assume you’re buying the property with a mortgage. After speaking with your lender you think you can get an interest only mortgage which will cost you £150 per month. The house you’re buying won’t incur any service charges or letting agent fees. You do however foresee that you will have to pay about £200 per year in maintenance fees.

Annual Income = £7,200.

Annual Costs = £2,000 ((£150 x 12) + £200)

Property Purchase Price = £120,000

This would give you a net yield of 4.3%.

How To Calculate Return on Investment (ROI)

What Is Return on Investment (ROI)

Your Return on Investment is in my opinion, the most important of the calculations you have in your repertoire. That’s because it gives you an indication of how well the money you’ve invested is working for you. What this calculation does is very similar to the Net Yield, only instead of dividing by the property purchase price – you’re dividing by the money you actually put into the deal.

How to Calculate ROI

A Working Example

Continuing with the same theme, let’s assume the house you’re purchasing for £120,000 you’ll be financing with a 75% mortgage deal with your lender. This means that £90,000 will be coming from the mortgage, and £30,000 will be from your savings account.

Annual Income = £7,200

Annual Costs = £2,000

Cash Invested = £30,000

This would give a return of investment of 17.3%.

Which Calculation Should I Use?

The simple answer is all three. When you are comparing deals against each other you should give yourself a good rounded view. That being said, if you don’t plan to buy with a mortgage then the bottom two calculations will give you the same return, so you’ll just need the two yield calculations.

Do you want a quick way of calculating all three? Use my simple excel tool to get you the figures you want. I pulled it together ready for when I start looking myself and thought I would share it with you all for free too.

You can download it here! Completely free of charge!

Buy To Let Yield Calculator

Hope you’ve found this useful.

Thanks all and I hope you have found both the article and free calculator useful! Don’t forget to subscribe!

Thanks,

Chris

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