A question I am sometimes asked is ‘what is net yield and how does that differ from gross yield?’. In an earlier post we thought about gross yield which is basically the rent divided by the purchase or the value times 100. A very basic assessment of the return that you are going to get from a property.
Net yield allows us to go into a slightly more sophisticated view of the property because net yield is the return of the property but taking into account the costs involved. If you were calculating a true net yield then you would be taking off the costs of purchase probably, but also the costs of letting the property out. The rent which you are going to receive is going to come at a cost. You are probably going to have a letting agent, you are probably going to have letting fees, you are going to have a managing agent who’s going to manage the property and collect the rent for you, probably.
You could even take this further because a true net yield could also reflect the cost of financing the property. So, as well as taking those costs off the rent, you may also deduct the costs of mortgage interest, for example. If you wanted to get really, really sophisticated you could even get into the realms of taking tax off, but that’s beyond a lot of us.
It all depends on what you are trying to do because the reason why I would be calculating a net yield as opposed to a gross yield is I would be looking at the actual return to me personally. A net yield would allow me to take into account the actual cost, for example, of finance to me.
It may be that with your particular circumstances you can go to lender A who are going to lend you a buy to let mortgage at 2.5%. Perhaps because of my circumstances I have to go to lender B and they’re going to lend to me at 3%, in which case our net yield is going to be slightly different. So, you can work out what the net yield would be to you and I can work out what the net yield would be to me.
Similarly, if you are going to manage the property yourself and not have a managing agent then that’s going to increase the return to you so you would have a slightly different net return then I would because I would use a managing agent.
Again, as I was saying in the video about gross yield, there is no real standard definition and you will see people talking about gross and net yields as if everyone understands what they’re talking about but you need to understand what that particular person has taken into account.
For example, if you are going to go to a deal packager or deal sourcer who starts banding around figures saying this is going to net you 6%, find out what that means. What have they taken into account? Because very often you will find, for example with the deal packager and the deal sourcer, that all they’ve done is deducted the mortgage interest but they haven’t found the other costs that are involved, like the managing agent, like any repairs which may come up, like any void periods that maybe needed to be taken into account when you don’t have a tenant.
Why do we use terms like gross yield and net yield? Basically, as an aid to comparison but you need to know that you are comparing apples with apples, and not apples with pears.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
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