How to Calculate the Yield on a Property Investment

Written By Primal Transformations .

Yield is a critical metric when assessing the profitability of a rental property. It gives you a snapshot of the return you can expect from your investment, based on the rental income generated. Here's how you can calculate the yield and also assess the return on your initial investment.

Calculating Gross Yield

The gross yield is calculated using the formula:

Gross Yield (%) = (Annual Rental Income/Property Purchase Price) ×100

Let’s break it down using an example:

  • Purchase Price: £210,000

  • Monthly Rent: £1,250

First, calculate the annual rental income:

Annual Rental Income = £1,250×12 =£15,000

Now, apply the formula:

Gross Yield (%) = (£15,000/£210,000)×100 =7.14%

So, the gross yield on this property is 7.14%.

Calculating Return on Initial Investment

The return on initial investment (ROI) gives you a more detailed understanding of profitability by taking into account upfront costs like the deposit, fees, and any refurbishment costs. Here’s how to calculate it:

1. Estimate Upfront Costs

  • Deposit (25% of purchase price): £210,000 × 25% = £52,500

  • Stamp Duty (for second property): Approx. £7,800

  • Legal Fees and Other Costs: ~£2,500

  • Total Upfront Costs: £52,500 + £7,800 + £2,500 = £62,800

2. Calculate Net Annual Income
Subtract any ongoing costs (e.g., mortgage interest, management fees, and maintenance) from the annual rental income. Assuming:

  • Mortgage Interest (3% on £157,500 loan): £4,725

  • Management Fees (10% of monthly rent): £1,500

  • Maintenance Allowance: £500

  • Net Annual Income: £15,000 - (£4,725 + £1,500 + £500) = £8,275

3. Calculate ROI

ROI (%) = (Net Annual Income/Total Upfront Costs)×100

ROI (%) = (£8,275/£62,800)×100=13.18%

What Does This Mean?

  • The gross yield gives you a quick, high-level view of the property’s earning potential, showing a 7.14% return on the purchase price.

  • The ROI provides a more nuanced perspective, factoring in initial and ongoing costs, showing a 13.18% return on the upfront investment.

Both calculations are essential when evaluating a property, helping you to decide whether it’s the right investment for your portfolio. By knowing how to work out these figures, you can make informed decisions and better predict the potential profitability of a property.

Primal Transformations .