When you get interested in property investing you’ll hear a lot of talk about 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 yield doesn’t really tell us that much.
It’s an indicator, and 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 yield 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 potential properties I might use gross yield to do an initial sort-out.
For my strategy 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.
For different strategies, and different locations, I could use a different gross yield, or a different indicator altogether.
And don’t forget, this is just for an initial sort-through just to try to find properties which might meet my overall and more detailed buying criteria.
What I think is much more important for me is looking at the personal net yield, rather than a general net yield, after taking into account my particular costs of owning a property.
In it’s simplest form Net yield is The gross yield but less costs such as mortgage interest, management fees, etc etc
Even better than my own personalised net yield, I use this simple rule.
If I am buying a property, generally I want to buy a property which I can add value to. In my world that means buying 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 value to the property I can then refinance it after six months, 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.
That means I can keep rolling the same lump of cash into more deals 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 are, firstly seeing whether I can get all or most of my money back out of the property. If I can then that ticks the box.
Secondly, I’ll look 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.
If I can tick both of those boxes then that is the basis on 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 give me that level 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.
At the right level of gross yield there is a good chance that it will happen and so, at about 8%, the deal will probably work (where I buy – this will be different for us all – this is not a hard and fast universal rule).
I will still 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 and so on before I can make a decision whether to go further in the buying process.
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 I 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 often I will ignore Gross Yield, and I almost certainly won’t base a buying decision on Gross Yield.
Peter Jones B.Sc FRICS
By the way, I’ve rewritten and updated my best selling eBook, 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. For more details please go to ThePropertyTeacher.co.uk