Calculating The Yield On A Property Investment
The yield of a property is defined as the income paid out on an investment, expressed as a percentage of its capital value. Yeilds are normally considered over the period of one year.
To calculate the yeild of an investment you divided the income generated by the investment over a year by the capital value of the investment. The formula would then be:
yield = (income / capital value) * 100
So for a concrete example if you own a house worth £120,000 and it generates £500 per month the yearly income is £6000 and the calculations becomes:
yield = (6,000 / 120,000) * 100
yield = 5%
The yield is useful to know when comparing properties. It's not ideal for comparing different investment vehicles, i.e. the stock market versus property investment as it compares only the income element of the investment, not the capital growth or potential risk.
The yield however can be extremely useful for calculating the value of a property to you. For example if you wish to achieve a 5% return on investment (ROI) across your portfolio of investments then you will need to ensure that any property you buy achieves a minimum yield of 5% you can the use this information along with an idea of the likely rental a property will achieve to determine the maximum price you should pay for the property.
maxmimum price = (100 / yield) * 12 * monthly rent
So considering a concrete example if you are looking to achieve a 5% yield on a property and you believe the monthly rent will be £550 then:
maximum price = (100 / 5) * 12 * 550
maximum price = £132,000
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