Jonathan talks about how rental yields and returns work, in reply to a question emailed in.
Investment rental return rates and yields, could you please explain how they work?
Investment rental return rates or yield as it’s often known, is something that landlords use to calculate the value of their property and investment.
So, it’s generally a cost of the property; lets say it’s £100,000, if you rent it out and you obtain £10,000 a year in rent then your yield or return is 10%.
It’s also worth knowing, of course, that in 10 years if you carry on the rent at that rate the property has paid for itself.
So, you can see why people like buying property to invest in.
It’s important to remember though, yield generally will be gross or net.
Gross being £10,000, that’s all the rent you’ll receive.
The net is actually what you might, in theory, be able to put in your pocket and that’s normally a hell of a lot less than the gross rent, because you’ve got lots of things to come out of it like:
- Building insurance
- Interest on mortgage
- Repairs carried out
- Any periods without a tenant or getting no rent
So, generally there is a big difference between gross and net yield. Well worth bearing in mind if you’re thinking about buying.