On a back to basics video which I did recently I defined gross yield. Gross yield can be a great way of comparing properties because you can look at the return from one property and compare it with a return on another.
But at its very basic level, gross return doesn’t really tell us that much. It’s an indicator, it’s one of many clues which we may look at when we think about whether we want to buy a property or whether we don’t want to buy a property.
However, in itself gross return doesn’t tell us very much. So, I tend not to use gross yield other than in a very general sense, maybe if I am flicking through Rightmove for properties.
I usually work on the basis that I’m looking for a yield of around 8%. That is not a hard and fast rule, it might be 7% or more than 8% depending on what the property is but it is only one indicator as to whether a property is going to be the right property for me.
What I think is much more important for me is looking at the personal net, rather than a general net, after taking into account my particular costs of owning a property.
Even better than that, I use this simple rule. If I am buying a property, generally I want to buy a property which I can add value to and in my world that means a cheap property because they are good for renting out, and a cheap property that needs a refurb is ideal because I can use the refurb to add value.
When I’ve added the value to the property I can then refinance it after six months, and I’ve done another video about the six month rule if you want to check that out, and then through refinancing I can get most or all of my money back out and do the same again, buying another property that needs a refurb and keep doing the same thing.
If I am looking for that type of property, the two things that I look for that I think are more important than gross yield, or even the personalised net yield although it is useful, is seeing firstly whether I can get all or most of my money back out of the property. If I can then that ticks the box.
Secondly, looking at the cash flow situation after I’ve refinanced. If I can get all or most of my money back out, and crucially the property still gives me a positive cash flow that ticks the second box. That is the basis in which I would be looking to buy my property.
That is why, sometimes, I will ignore the gross yield because the gross yield doesn’t come to that granularity of detail and it’s not going to tell me whether a) I’m going to get my money back out or b) whether it’s going to cash flow when I do. Although, at the right level of gross yield it’s going to give me an indication whether there is a good chance that it will happen, let’s put it that way.
So, at about 8% it is probably going to happen, but I will need to go into much more detail looking at the property, looking at the refurb, looking at the costs, looking at the rent, making sure that there is good tenant demand.
All of that needs to be taken into account before I can tick the box that says ‘yes I will get most or all of my money back out’ and before I can tick the box saying ‘yes once you have got your money back out then the property is going to give a positive cash flow’. But that is my rule for buying. That is why sometimes I will ignore gross yield.
Here’s to successful property investing.
Peter Jones
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
www.ThePropertyTeacher.co.uk
PS. By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same.
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