How the top investors ensure that they find the best property investments
If you're a landlord or thinking of investing in property, you may have come across the term yield before. But what does it actually mean?
If you're a landlord or thinking of investing in property, you may have come across the term yield before. But what does it actually mean?
The property investment yield is the amount of money the investment will give you. The income that you will receive from this property investment.
It's a loose calculation based on the property value and the rent you'll receive for that property, giving you a percentage figure or rate of return. This percentage is similar to the interest you earn on a savings account.
For example, you may have £50,000 in savings, and that account may pay an interest of 1.5%. The yield for the money saved in that account will be 1.5%.
It's often much higher for property, which is why investors consider property investment as a vital component of their overall investment portfolio.
So, how do we calculate the yield for a property?
Determine the value or cost of the property. How much will you, or did you pay for it?
How much income will be generated from the investment? What will the rent be? This figure should be the annual income, so if it is rental payments, multiply the amount by 12.
Divide the annual income by the value.
Then multiply this amount by 100 to give you the percentage.
The average yield for rental property investment in the UK is between 5-8%. You can see why a property is considered a good investment compared with a savings account.
With the Bank of England base rate still relatively low, interest payments on savings are pretty poor. And with rising inflation, the cash you've saved is technically reducing in value each year. This is because, although your £50k is still £50k, the amount of things you can buy with that £50k has reduced. Where you could buy a Range Rover, you can now only afford a standard BMW, for example.
Property values are much more robust. Historically, the value of property has increased, albeit with a few hiccups here and there.
A property is considered an asset because it will generate income. It will pay you a rental income each month, and your equity, or initial investment, is still tied up in the property, which is growing in value. In theory, the value will continue to increase whilst you own it.
Whereas if you spent £50k on a Range Rover, it will lose value whilst you own it. It's a depreciating asset that will cost you money to own and lose value over time.
Use the yield calculation to quickly figure out if a property is a good investment for you to buy. Suppose the percentage figure at the end of the calculation is less than 4%. In that case, you could probably make a better return with a different property. Or perhaps you could try to bring down the initial value price with some tough negotiation.
And you could go one step further. There will likely be expenses involved in buying a property, and often with investments, there is remedial work and refurbishment. Add these costs to the 'value' section to show the net yield. This is the actual cost of your investment into the property, not just how much it is worth.
Let's look at some examples.
If you buy a property for £100,000, the rental income is likely to be £500 per month.
6000/100,000 x 100 = 6.
So the gross yield for this investment would be 6%.
Now consider that there needs to be a new boiler and kitchen fitted in the property to achieve the £500 per month rent. Let's say that this will cost £10,000
You would still take the annual income, but the purchase price and the costs must be added to include your total spending.
6000/110,000 x 100 = 5.45%
The yield is now lower because you are investing more in the property. This is more accurate because it shows your actual investment, not just the purchase price.
Even so, this would still be a good investment. The additional £10k spent is not wasted because the property's value will have increased, and that capital increase belongs to you.
Use this method when looking to buy a property for investment so that you can quickly and simply see if the property is a good buy for you or not.
You don't want to put all your savings into a property that pays less than your savings account, do you?