A question I’m sometimes asked is what is gross yield and when would I use it. And in its simplest form gross yield is the return on the property. Now, often times that’s the return ignoring costs, and the most simple way of calculating gross yield is to take the annual rent and to divide that either by the purchase price or the value, depending on what’s relevant for you in your circumstances.
If you already own the property you might want to use value, if you’re about to buy the property you might want to use the purchase price. Hopefully, the two are going to be similar, unless you’re buying it below market value, in which case obviously you want the purchase price to be below the value.
So, you can already see that we are getting into some complications here, and the reality is that there is not really a standard way that investors talk about gross yield. Even if there was a standard definition at different points and different times, investors are going to be talking about a slightly different thing. But for our purposes it is essentially the return of the property ignoring costs.
So, rent divided by the purchase price or the value x 100 will give you the gross yield.
When do you use gross yield? For comparison purposes.
One of the times when I use gross yield particularly is when I’m looking for properties. I might be going through Rightmove or Zoopla looking for a property which is going to be right for my portfolio, and I might have a certain level, a certain minimal level, of gross yield or gross return which I need before I am interested in buying a property.
I would not base my buying on that alone, there is a number of things that I would be taking into account. But the starting point might be looking for a particular gross yield.
In my world a gross yield of around 8% works well, but if there are other factors involved then I might make it 7% or I might be sticking out for more. It’s not as simple as if you find a property at the right yield then you should buy it because there is other things that I am looking for. But in its essence that is gross yield.
As I say, you may have particular things that you want to take into account. Some investors when working out gross yield may take into account the fees, in which case it’s not just purchase price but it’s purchase price + fees.
It might make sense for an investor to work out the gross yield taking into account the costs of a refurb. So, it would be purchase price + costs (which could be legal costs, stamp duty) + the cost of any refurb. It all depends on what you’re going to be using the figure for and what you’re going to be comparing it with. But if you’re just skimming through Rightmove, probably a very basic gross yield of rent divided by purchase price x 100 will service in order to help you hone in on the type of property which is likely to be right for your buying criteria. But, it is going to depend on your buying criteria.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
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