Introduction

It is important to know how to calculate the returns your investment will make, below we will discuss and demonstrate some of the most common calculations and figures you'll need to know. You should always do a quick appraisal of any investment before you go ahead to make sure its worth your while.

When calculating rental yield values you can also examine the effect that borrowing has on your potential returns, such as between buying a property in cash and using a buy to let mortgage to fund the purchase.

How much you decide to borrow also depends on your attitude towards risk as we all know that interest rates can go up as well as down. It's really a matter of personal preference and how you see the local economy and cost of borrowing for the future that should influence your investment decisions.

A simple rental yield calculation

Lets say that you purchase a property for £100,000.
and you receive rental income of £500 per month from your tenant.

The yield calculation would be as follows:

£500 x 12 = £6000 per annum rental income.

(6,000 / 100,000) x 100 = 6% Yield

So simply put, Yield is the return on your investment expressed as a percentage of what you put in!

I.e. If you invest £100,000 and you will receive £6000 in profit/income per year, so £6000 is 6% of £100,000.

The above example has been put very simply without factoring in any property maintenance costs/insurance and doesn't include any mortgage payments.

Let’s look at calculating yield with a mortgage & associated costs

Let’s say you purchase a property for £100,000 but this time you use a buy-to-let mortgage and have to pay for the property insurance and some maintenance costs.

The following are the figures we use to calculate the yield value;

Purchase costs: £1000 (including solicitors fees and insurances etc...)
Deposit at 15%: £15000

Mortgage costs are calculated as follows:

A £100,000 property (purchase price) with a 85% LTV (loan to value) interest only mortgage at an interest rate of 5.5%.

£100,000 - £15,000 = £85,000 mortgage

Monthly repayments are: £85,000 x 5.5% = £4,675 per annum. £4,675/12 = £389 per month.


The gross profit would be;

£500 rent - £389 Mortgage = £111 gross profit per month

£111 x 12 = £1332 per annum.

Now we have these figures we can now calculate the yield value as follows;

Amount invested so far is: £16,000 (deposit + costs)

Annual gross profit is: £1332

(£1,332 / £16,000) x 100 = 8.3% Yield Value on cash amount invested

Looking at these figures you could have bought 6 properties secured on a buy to let mortgages with a £100,000 investment and receive £7,992 in gross rental profits compared to £6000 using the cash to purchase one rental property.
Also because you can now buy 6 properties you will own a larger amount of assets (£600,000) so you will also get greater capital gains if the house price was to rise in the future.

When you use a mortgage or 'other people’s money' to purchase a buy to let property you can potentially achieve a much greater rate of return on you cash. Known as leverage or 'gearing up' most investors try to limit the amount of their own money they have to use, meaning they can spread their cash across many investments and not only increasing their rental yield, but also any chance of capital appreciation.

If you are unsure about your investment decisions it is recommended that you obtain professional advice from a financial advisor who can help you make decisions based on your own personal circumstances.