A question I’m sometimes asked is what is, “gross yield and when would I use it?”
In its simplest form gross yield is the return on the property. Now, often times that’s the return ignoring costs, and the most simple way of calculating gross yield is to take the annual rent and to divide that either by the purchase price or the value, depending on what’s relevant for you in your circumstances.
For example, a property worth £120,000 producing an annual rent of £8,000 a year will have a gross yield of:
£8,000/£120,000 x 100 = 6.67%
If you already own the property you might want to use value, but if you’re about to buy the property you might want to use the purchase price. Hopefully, the two are going to be similar, unless you’re buying it below market value, in which case obviously you want the purchase price to be below the value.
You can probably already see that we are getting into some complications here, and the reality is that there is not really a standard way that investors talk about gross yield. Even if there was a standard definition at different points and different times, investors are going to be talking about a slightly different thing. But for our purposes it is essentially the return of the property ignoring costs.
When and why would you use gross yield?
For comparison purposes.
Either to compare a property with other properties.
Or to compare property as an investment with another type of investment (like Gilts, shares, cash on deposit etc)
One of the times when I use gross yield is when I’m looking for properties. I go through Rightmove or Zoopla looking for a property which is going to be right for my portfolio, and I might have a minimal level of gross yield or gross return which I need before I am interested in buying a property.
I would not base my buying on that alone, there are a number of things that I would be taking into account. But the starting point might be looking for a particular gross yield.
In my world a gross yield of around 8% works well, but if there are other factors involved then I might make it 7% or I might stick out for a higher return. It’s not as simple as if you find a property at the right yield then you should buy it because there are other things that I am looking for.
There may be times when using rent and purchase price (or value) is too simplistic and you may want to take other things into account. Some investors, when calculating gross yield, may also take into account the fees, in which case it’s not just purchase price but it’s purchase price + fees.
Or it might make sense for an investor to work out the gross yield taking into account the costs of a refurb. So, it would be purchase price + costs (which could be legal costs, stamp duty) + the cost of any refurb. It all depends on what you’re going to be using the figure for and what you’re going to be comparing it with.
You will need to work out which figures are important to you, bearing in mind your strategy, and what you are using the resulting figure for.
Here’s to Successful Property investing
(ex) Chartered Surveyor, author and property investor
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