As you probably know, yield is a measure of the return you’ll make from a buy to let property deal. In this post we’ll look at what you really need to know about yields, what makes a good yield, and at how to find better yields more easily.
First, what does yield mean exactly?
Yield is a basic tool for assessing returns from buy to let property deals. The most common measure of yield is gross yield. Gross yield is a property’s annual rent divided by the likely purchase price expressed as a percentage.
For example: A property which costs £180,000 to buy and is likely to earn £825 pcm in rent will have a yield of £825 x 12 = £9,900 divided by £180,000 x 100 = 5.5%.
Gross yield is a basic rule of thumb. It is simple to use and consistent across different scenarios. But it has its limitations in that it only uses the property price and the rent.
The differences between gross yield, net yield and ROI
A slightly more useful yield calculation is net yield. Net yield allows for expenses, although it still does not allow for the cost of finance.
For example: Assume a property costs £180,000 to buy, is likely to earn £825 pcm in rent and has estimated annual expenses (managing agent, maintenance, voids) of £1,485. This will have a net yield of £825 x 12 = £9,900, minus £1,485 = £8,415, divided by £180,000 x 100 = 4.68%.
To take things a step further ROI or Return On Investment is an even more insightful calculation to use.
The snag is, of course, that anything other than simple gross yield needs more figures and more number crunching. (Keep reading because a simple solution is coming up!)
What is a good buy to let yield?
The first thing to know about yield is that there is NO fixed number for what a good yield is!
What is a good yield depends on the views of the individual investor, and on what their own objectives and requirements are. However, it’s sensible to benchmark your buy to let yield on property deals against market averages as well as what other returns you could get on your investment.
In times when base rate was around 5% a buy to let yield of 5% did not look all that attractive. Today with base rate at 0.1% a 5% yield on a property deal looks much more so!
Consider carefully whether you are investing for income or growth. If you are investing for income a good yield is absolutely critical. If investing for growth a small yield may be acceptable on the basis you’ll benefit from long term capital appreciation. In practice many investors look for a combination of both.
Buy to let yields will also vary by area and type of property: It’s often the case that low priced properties show a better gross yield than properties in expensive areas where yields are often tight and occasionally negligible. Smaller properties often return a better yield than bigger ones. A single family buy to let will generally return less yield than a HMO or student property which could show twice as much yield or more – although the expenses of running it will be higher.
As we mentioned, a good practice when looking at buy to let yields on potential property deals is to benchmark them against market averages and against similar properties.
You can use PaTMa's BTL Yield Explorer feature, which crunches the numbers for average prices against average rents, to see the yield available for any location in the country.
As a general guide in the south of the country 3-6% is often considered a good buy to let yield range. While in the north 5-8% is often considered a good return on a property deal.
So how do you find the best buy to let yields?
In the past investors used a certain amount of ‘gut instinct’ to spot properties and locations where good yields might be had.
Today, however, it’s not entirely safe to rely on instinct or any assumptions about where good yield are to be had. It’s much more satisfactory to properly calculate your likely yields for every property you’re interested in.
You can calculate a quick gross yield figure using a calculator or even the ‘back of an envelope’ method. Tip: Aim to use the likely buying price of a property rather than the asking price. Also aim to estimate rent on the low side of what is likely to be achieved.
Calculating good buy to let yields can be tricky and time consuming. Fortunately PaTMa offers some tools that can instantly calculate accurate possible yields for you. And not only that but help you to spot the very best yields more easily!
PaTMa’s free browser extension shows a quick indication of likely yield and ROI overlaid as you search for property deals using Rightmove and Zoopla. It saves you from doing the yield calculations yourself and can help you spot where the best ‘hot yields’ might be.
PaTMa’s free Buy to Let Property Profit and Tax Calculator is ideal for quick calculations. You can just input basic numbers and then investment needed, yield, ROI and also forecast monthly profit are calculated for you automatically.
PaTMa’s Property Prospector allows you to dig deeper, and get a much more accurate and reliable projection of likely buy to let yield on your property deals.
Property Prospector is powerful but still very easy to use: Just add a property as a prospect plus some relevant figures including price, rent and costs. Prospector then instantly calculates accurate projections for you including yield, monthly and annual profit, ROI and more.
Other benefits of Prospector are that you can customise it to suit your own personal circumstances and different costs. You can use it to find local price and rent comparables to make your input figures more accurate. You can tweak the numbers and, for example, see what affect making a lower offer would have on yield. You can compare two or even many properties back to back to find the best place for your money. You can even see what impact tax will have on your returns.
Working out a rough gross yield has served investors well for many years and is still a handy guide. However, for today’s investor who needs to be able to sort through hundreds of potential property deals quickly, get accurate financials on them easily and find the very best buy to let yields Property Prospector is the essential tool.