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 expressed mathematically as the rent divided by the purchase price, or the value, times 100.
It provides a very basic assessment of the return (from the rent) 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 (rental) return of the property but taking into account the costs involved in buying and owning the property.
If you calculate a true Net Yield then you could account for the costs of purchase, and also the costs of letting the property out and holding it.
The reason for this is that 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 probably going to have a managing agent who’s going to manage the property and collect the rent for you. And in return they will charge fees which are most likely going to be paid from the rent.
You could even take this further because a true Net Yield could also reflect the cost of financing the property. So, you may also account for the costs of mortgage interest, for example.
If you wanted to get really, really sophisticated, and if you had reasons for doing so, you could even get into the realms of accounting for your tax.
It all depends on what you are trying to do because the reason why I might calculate a Net Yield, as opposed to a Gross Yield, is to look at the actual return to me personally of owning a particular property.
You can probably see from the above that Net Yield can be a very personal figure, based on our actual costs, and not a generic market average like the Gross Yield.
For example, a calculation of Net Yield could allow me to take into account the actual cost of finance to me.
It may be that with your particular financial circumstances you can go to lender A who will lend you a buy to let mortgage at 2.5%. Perhaps because of my financial circumstances I have to go to lender B, and they will only lend to me at 3%, in which case our calculation of Net Yield is going to be slightly different, even if we bought identical properties.
So, by understanding our actual costs, 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 Yield than I would if I appointed a managing agent.
As far as I am aware there is no real standard definition of Net Yield.
Unfortunately you will see people talking about Net Yields as if everyone has the same costs, and as if there’s only one possible mathematical outcome, but you need to understand what that particular person has taken into account.
For example, if you are going to buy a property from a deal packager or deal sourcer, they may bandy around figures saying something like, “This is going to net you 6%”.
But unless they understand the actual costs to you, how can they say? They can only give an average ‘guestimate’.
To know how relevant their Net Yield is to you, you’d need to know what they have taken into account, and how they’ve accounted for it.
Very often you will find, for example, that all they’ve done is accounted for potential mortgage interest but they haven’t accounted for the other costs that are involved, like a 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.
And, of course, going back to my earlier example, how can they know which mortgage product you’ll get and how much you’ll pay?
Net Yield can be a great personal tool and can be a useful aid to comparison, but we do need to know that we are comparing apples with apples, and not apples with pears.
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