What is it? - Yield
The first question a property investor when considering a purchase is: what is the yield? this should only be the starting point. If it is good then go for it. If not forget it!
Yield in it's purest form is: What you get out relative to what you put in.
To calculate yield you simply divide what you get out by what you put in and express it as a percentage. In mathematical terms, this is:
What you get out x 100
What you put in
Yield can be broken down into two variants, gross yield and net yield. Quite simply yield or rental yield is the amount of money a landlord receives in rent over the course of one year, expressed as a percentage of the amount of money invested in the property.
For example, if a buy-to-let investor buys a house worth £200,000 - and tenants pay £10,000 a year in rent - the rental yield on the property would be five per cent. i.e. return (£10,000) divided by investment (£200,000) multiplied by 100 (to turn it into a percentage).
This simple calculation shows gross yield and does not factor in property costs such as maintenance, purchase costs, insurances and mortgage costs. When factoring these you can establish your net yield. Quite simply net yield is the yield calculated by using the rental income figure net of expenses.
The target yield that an investor will be aiming for is very much a personal choice as it is dependent on the individual's investment strategy. Many investors as a minimum will be looking for a yield that at least covers any mortgage interest repayments. Of course the yield will also be affected by the level to which the property is mortgaged and the interest rate that is applied to any mortgage.