What are yields and why are they important for property investment?
The yield of a property is the annual rental income, expressed as a percentage of the total value of the property. To put it simply, it is the annual rent compared to the total value of the property.
For example, a property with a value of £300,000 with an annual rental income of £15,000 would generate a 5% Yield.
To calculate yield, you take the annual rental income and divide it by the total value of the property, you then- multiply this figure by 100 to create the yield of the property. Yield is one of the most common figures used by property investors when comparing the return from investment properties.
Yields come in two forms:
Gross Yield- This is the annual rent which is shown as a percentage of the total value of the property, without deducting operating expenses (agents fees, voids, utilities)
Net Yield- This is the annual rent which is shown as a percentage of the total value of the property, after the deduction of expenses.
Why is it important?
Yields help investors to determine how profitable an investment may be. The higher the yield then the higher the return on the investment, therefore making it more attractive to potential investors.
It also allows an investor to compare different property types such as commercial, HMO (House of Multiple Occupancy) and financial assets such as stocks and shares.
Should you invest in a share which generates 5% yield or a property at 7%? There is not a simple answer as they both have different risks associated with them but comparing the yield is important when comparing the two.
What affects residential property yields?
There are several factors that affect the yield of a property. The biggest factor that affects yields is the geographic location of the property. Average house prices across the UK dramatically vary due to the location they are situated in. We often find properties situated in or near London demand a higher average purchase price than compared properties found further north.
The reason behind this is that property prices across the country vary due to several factors, such as infrastructure and the average cost of living. So, depending on the location of the property, the yield will vary and be unique to that area. We have previously produced an article that explores the different average yields achievable in various locations across the UK, as well as the difference in yield due to property type. This can be found here Geographic Yield Analysis 2021 – Advocate Finance
At Advocate Finance, we utilise an internal database which allows us to store all previous valuations that our clients have received. We can use this data as comparable evidence to compare an investor’s property against a wide range of previous valuations in that specific area. This allows the applicant to determine whether they are paying a fair price for their property based on the predicted rental income. This can also reveal whether rental income for the subject property is being overcharged or undercharged in comparison to properties in that area.
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