gross yield..

hi,
a novice question i know but i hear about gross/net yield a lot on this site…
could someone give me a dummys guide to what they are and what is a good or bad yield on a property…

Simple guide…

Gross is the amount you take in…
Net is what you have left after taking care of costs/taxes etc.

the % yield is dependent on the value of the rent in relation to the overall cost of the property…
I think I saw somewhere that 6% gross yield is around break even point… but I’m sure someone will provide more accurate info

Not an expert so someone please correct me if I’m wrong, but as I understand it this is the main differene between gross & net yield.

Gross yield = Annual Rent / Property Value

Net Yield = (Annual rent – Annual Costs) / Property Value

And if the gross yield is below what you could earn in interest in a bank, then you know bricks & mortar are not such a good investment after all.

Gross Yield is A Years Rent divided by the cost of buying the house and getting it into rentable condition.

If you’re just doing a rule of thumb check then a years worth of rent divided by the asking price of the house.

So to use a real example that’s out there right now.

Monthly Rent is 1400 (16800 a year)
Asking price to buy is 485000

So gross Yield is 16800 / 485000 * 100 = 3.46%

Or to put it another way if you had 485000 to invest, this house would pay you 16800 year, which is 3.46%

You could get more by letting your 485000 sit in a bank account, and you’d have a lot less hassle.

In reality the Gross Yield would be less because there are entry costs in the property business. The Cost of buying it, Stamp Duty, Furnishing decorating etc. You have to do these things to get it into rentable shape.

As for what’s acceptable. How long is a piece of string?

Some people think 3% is perfectly fine.

Some people actually think a negative yield is fine, in other words they are ok with taking in less in rent than they are paying out in mortgage interest. Each month they pay a little bit to keep tennants in their property.

Unless proeprty prices are really shooting up, I can’t understand settling for a yield that’s less than you can get for leaving your money sitting in a deposit account.

This article is from a few years back before the sh1t really hit the fan, but even then it was clear that things weren’t right.

-Rd

thanks daltonr and others for the explanation…

But as any savvy Estate Agent will tell you, the real nugget is the capital value of your property increasing;

Net Yield + “Expected Appreciation in Value” = Overall Yield

Oh forgot, that bit is negative now 8) :frowning:

I know that is tongue in cheek, but it is surprising how many people seem to think the way you describe when it is horribly wrong.

That isn’t a yield, but an expected return. An entirely different animal.

I thought that was Net Yield * Gullibility = Overall Yield (for VIs that is) :smiling_imp:

Talk of yields and doing sums were for losers when prices were on the up. What was the point? You’d have missed the gravy train with that attitude.

How come it’s called a gravy train when in fact gravy is served in a boat.

Anyone for some Gravy titanic :question: :smiling_imp:

The above is incorrect.
A negative yield is not as you describe it above.
The lowest yield you can have is 0%.
Negative yield does not exist - neither in theory nor in practice.

In your analysis you are including interest as an expense - thereby having a negative yield.

interest rates are not included as an expense when calculating a yield.

And as for your second statement, what you are fprgetting is that normally people don’t buy property with all their own cash.
They nearly always borrow a substantial part of the purchase price.

The situation you put forward would almost never ever happen in practice.
As a result it’s not even worth talking about.

This gravy train?

https://james.lab6.com/2006/static/train_wreck_at_montparnasse_1895_small.jpg

-Rd

Not a gross yield. But they certainly should be be if you are using primarily borrowed money to acquire the asset and it’s associated revenue stream.

Indeed - the term ‘negative yield’ is wrong, but the point remains valid. Some ‘investors’ are paying more in mortgage interest than they’re getting in rent. Negative cashflow would be more accurate.

Which doesn’t massively change the situation.

If you can get more from putting your money in a bank than renting property, then you are certainly not going to get enough rent to pay for borrowing that money.

Actually every investor who could have sold up and got better returns on their money than they did by keeping the property is in exactly that situation - before you even consider capital losses.

Even if their original investment is easily paid by the rent, they’re foregoing the possible returns on the current price of the property, not on the original purchase price.

whether they should be or shouldn’t be is neither here nor there.
The bottom line is that they are not.

the whole point of yield is to use it as an easy comparison to the interest rate you are paying.
If it is greater, then you are in positive cash flow.

i suppose someone could go off and make up a new word whereby you lastly deduct the interest rate from the yield.
And if this figure is greater than zero you are then in positive cash flow.

Much of a muchness really i supppose.

it seems the pedantic pats are out in force.

So, yes, AAM is correct, yield is an absolute number. You can be “yielding negative returns” but yield itself is defined as >0

Second, some of your calcs or descriptions forget about the leveraging!!

Your yield would be
{(all income less all expenses of the property)/
the amount you invested in the property

minus the yield of the leveraging element (ie the mortage rate) + the yield on the capital appreciation of the property

this would be your return, which is a yield on your overall position and can be compared to placing money on depoist

of course, one would also have to discount forward the purchase price or discount back the expected future sale price to ensure that you are looking at flows in the right time period…

edited for cap app part

smartmoney.com/ahead-of-the- … -investing

-Rd

Again, this would not be convention. A yield is commonly regarded as a cash flow replative to a capital outlay.

A capital gain, if it occurs or is expected, would be included in an expected return or an IRR (again, a return), but would not be referred to as a yield. Using that sort of nomeclature would point you out as a novice in professional investment circles.

Interesting to turn that calculation around too. Assume 1400 per month rent, and a desired yield of 6%. This house should cost €280k:
(16800/Cost * 100 = 6%)
Still sounds too steep.