Rental Yield . . .
The rental yield is one of most important factors to consider if you are intending to purchase a property as a BTL (Buy to Let).
Calculating the rental yield of any potential BLT property will quickly allow you to determine if the property is going to have the desired cash-flow that you require to make a sound investment. Of course, this is only one of many factors you will consider when looking at an investment but it is a very important one.
Calculating Rental Yield
There are two common rental yields, these are as follows:
· Gross Yield
· Net Yield
Gross Yield is the annual rental income generated from the property expressed as a percentage of the capital value (cost) of the property.
For example, if the property costs £100,000 to purchase and generates an annual rental income of £5,000 per annum, then the rental yield is 5%. This means that each year the investor would recoup 5% of the purchase price.
The target yield that investors seek from a property is a personal choice and depends on the individual’s investment strategy.
There are two principal investment strategies:
· Cash Flow
· Capital Appreciation
For example, a person may accept a lower rental yield on the basis that the property is generating strong capital appreciation.
Generally investors seek a rental income or yield that will at a minimum meet the interest only repayments on the mortgage, this, however, has become very difficult in current market conditions.
Net Yield is the yield calculated by using the rental income figure net of expenses.