| by Kenneth Chase | 15 comments

How To Calculate The Numbers On A Rental Property | Net Yield And ROI | Real Estate Investing Tips


Hello, it is so important that you know the
potential cashflow of a property and that you know the difference between gross yield
and net yield. A property will fall into 1 of 2 categories
in financial terms. It will either be an asset, or a liability. Now an asset produces a positive
net cashflow each month, meaning that it puts money into your bank account every month,
and a liability, produces a negative cashflow meaning that it won’t pay anything into
your bank account each month and it will actually be costing you money to run even
though you’ve got people living in the property and paying you rent. You also want to know what your Return On
Investment or your ROI will be, because you can then compare that to other properties
or even other asset classes outside of property market. When you run the numbers on your calculator
you will have a better understanding of the investment you are looking to buy and it will
help you make an informed decision as to whether you take action and buy it or you leave it
and walk away. The formulas are very simple and they can
be used to assess any property and I will take you through them both, step by step in
this video. Hi, I’m Andy Walker from monoperty.com where
I blog online about my journey as a property investor and landlord, sharing what works
for me, and what doesn’t, to help you start or expand, your property portfolio. Quite often, I have seen properties up for
sale that are advertised as producing a 10% rental yield to attract the buyer. Now
the yield is calculated by dividing the annual rental income by the purchase price and then
multiplying it by 100. So if a property produces £12,000.00 a year in rental income and costs
£120,000.00 to buy, then that will give you a 10% yield. The problem is, this is a gross yield, as
it doesn’t take into account any expenses that your going to incur like mortgage payments,
or insurance payments, any management fees, costs of repairs and doesn’t account for
any void periods or vacant periods either. So as an investor you need to calculate and
focus on the net yield because this will tell you whether you are looking at buying an asset
or a liability. It will also enable you to plan ahead for property upkeep, which is going
to happen whether it’s a few pounds for a light bulb or a few thousand pounds for
a new boiler! To calculate the net yield there are 4 figures
that you need to know: the Purchase Costs
the Annual Rental Income the Finance Payments, if you’ve used a mortgage
to buy the property, and the Operating Expenses Now we will need to itemise the expenses on
a monthly basis. And for this example I will use a property
that a friend of mine is looking to purchase, which is a 3 bedroom terrace house, it was
refurbished about 5 years ago and it’s in great condition. The price is £85,000 and there
will be £2,000 of expenses in legal and mortgage fees. The annual rental income is £9,360.00 and
he has found this figure by researching online to see what other properties are achieving
and by talking to local management agents in the area. Now if we divide the annual rental income
by 12, this will give us £780.00 per month in rent. Ok, so if your purchasing the property with
a mortgage you will need to know how much your mortgage payment will be. And if you
have an Application In Principle from the mortgage lender, then that will tell you what your monthly payments are going to cost you, if you don’t have an Application In
Principle yet, don’t panic, you can use an online mortgage calculator, and I’ll
put a link to one in the description below, so you can have a play about with it and find
out how much your mortgage payments are likely to be. And that’s exactly what I have done for
this example, I’m using an interest rate of 3.89% which is comparable in todays market
when filming this video. There are cheaper products out there but there are also more expensive products, so this is a good middle of the road percentage. The amount borrowed on a 75% loan to value,
with a purchase price of £85,000.00, is £63,750.00 with a monthly payment of £206.66. If you wanted to have a higher loan to value or if you wanted a repayment mortgage instead of an interest only mortgage, then the costs will go up. There are advantage and disadvantages but I don’t want to discuss that in this video because I’ll get side tracked, but that is another video to look forward to in the
future. Yay! Now your insurance will be around £17.00
per month and again you can get an idea of this by looking at comparison websites online. Now a property management company or a letting agent typically charge about 10% for a full management service plus VAT. And that will work out to
£93.60 because 10% of 780 is 78 + 20%=£93.60 For repairs I like to put aside a minimum
of 5%, of the monthly rental income and in this case it will be £39.00. The age and
condition of the property will have an effect on how much you will need to spend on repairs,
so you will have to give it your best guess, there is no exact science on this, but what
you can do is keep a record, and over time you will be able to review that, look back,
and adjust that percentage if you need to. For void periods I put aside 8% of the total
monthly rental income and in this example it would be £62.40. The reason I use 8% is
because over a 12 month period that will accumulate to just under a months worth of rent. So I
will receive £748.80 as opposed to £780.00. Now although it’s slightly lower, if the
tenants do decide to leave after a year, then at least I’ve got enough to cover my mortgage
and my operating expenses, bearing in mind I won’t have any managing agent fees because
the property will be empty. And hopefully the managing agent will find me tenants within
a month, and I will be back up and running as usual. but it’s a good buffer to have. Right, when we add up our expenses we get
a total of £418.66 and when we deduct that from our rental income we are left with a
balance of £361.34. Now I’m sure you’ll agree that’s a very nice income to receive
from just one property. Now we’re able to work out the net yield
which is the total net income, divided by the purchase price, multiplied by 100. And
in this example we get 4.9%. This is a very good net yield. It’s a lot less than the
10% I mentioned earlier but remember that was gross and this is net. This is proving
that this property can run as a successful business. Now your notice that I added the £2,000.00
of legal and mortgage fees. Some people do not like to do this. I like to do it because
I see this as cash leaving my pocket and it’s all part of the investment. Which now takes us on to the last part of
calculating your return on investment. This is the annual net income, divided by
the cash you put into the property, multiplied by 100. This gives you a return of 18.6%.
This is fantastic, it’s outstanding, in fact, in a little over 5 years, you’d have received all the cash back that you initially put into the property. Now some properties may come with additional
expenses, like flats and apartments, they may come with ground rent and other maintenance
costs, so you will need to factor those into the equation, but at least you now know how
to do the calculations. If you have any questions about calculating
the net yield or your return on investment, then please leave a comment in the box below
or head over to monoprty.com/calculations. If you found this video useful, please give
it a thumbs up, and if it’s your first time visiting the channel, please click the subscribe
button so you won’t miss any of my future videos, that are all geared towards helping
you start or improve your property business. Thank you for watching this video to the end.
Keep your head in the game and take care. Bye for now.

15 Comments

Faisal AL-Taie

Nov 11, 2018, 5:16 pm Reply

Thank you very much for the information; could you please tell us why you think the ROI of 18.9% and net profit of 4.9% are fintastic????

In other words, what is the minimum limit for the ROI to be considered acceptable?

Handren Guitar

Dec 12, 2018, 10:49 am Reply

Thanks a lot

beuntje9

Jan 1, 2019, 10:50 am Reply

Hi, great explanation. Now say that I am negotiating with a future landlord on a commercial property for rent. He is buying the property for GBP 1M and needs to refurb for GBP 2M. LBTT is around 50K: , totalling the investment to the landlord to approx GBP 3M. Next he will negotiate a rent with me for a 10 year lease (18months rental free period). Assuming the operational expense for the landlord being 15% of the gross rent and he is asking a gross yearly rent of GBP 390k (excl service fee and taxes). Based on this the 10 yrs net income for him would be GBP3,1M (GBP3,3M rent including rent free period deducted for 15% operational cost). What would be the net yield (3,3% ? (3,1-3)/3,0?)? And do I calculate net yield incl residual value after we close the rent in Year 11>

True Brit

Jan 1, 2019, 3:43 pm Reply

How did he arrive at the cash you put into the property figure of £23,250 ? (7.27)

Abdi Ibrahim

Feb 2, 2019, 1:35 am Reply

Great video ?✌

Tracy MOO

Mar 3, 2019, 2:41 pm Reply

please help 07:17 the figure 23,250 where from?

JASONPORTER123

May 5, 2019, 9:00 pm Reply

Thanks. Very informative. Would you be able to do another video to cover the last piece of the puzzle on how to calculate the ROI once you refinance the property, for example, 6-12 months later. Thanks

Deego Ruddy

Jun 6, 2019, 6:32 pm Reply

Great video

aqib

Jun 6, 2019, 4:33 pm Reply

4:41

Andy Battle

Jul 7, 2019, 10:49 am Reply

Where is the Council Tax factored in as an expense?

Derrick Holmes

Jul 7, 2019, 8:22 pm Reply

Is there a reason you didn’t include tax?

Neelabha Chatterjee

Jul 7, 2019, 1:11 am Reply

Hi Andy,

Thank you for your very informative video. I’ve noted down the various calculations and have worked out a potential acquisiton.

I’ve noticed that the deposit on the property makes quite an impact on the ROI. I’ve moved it from a 10%-15% of deposit and the ROI has come down by almost 10% ! At the same time my yield goes up very slightly.

– Is a 3% yield a good investment?
– Do you use interest only mortgages? If so then how long and when is the capital payback period?

Neelabha Chatterjee

Jul 7, 2019, 1:11 am Reply

Hi Andy,

Thank you for your very informative video. I’ve noted down the various calculations and have worked out a potential acquisiton.

I’ve noticed that the deposit on the property makes quite an impact on the ROI. I’ve moved it from a 10%-15% of purchase and the ROI has come down by almost 10% ! At the same time my yield goes up very slightly.

– Is a 3% yield a good investment?
– Do you use interest only mortgages? If so then how long and when is the capital payback period?

Peter

Oct 10, 2019, 7:47 pm Reply

Do you have any videos that explains what you'll pay in taxes and whether using a limited company is a good route or not?

Nation Banzai

Oct 10, 2019, 9:26 pm Reply

I'm struggling to calculate a decent ROI on a simple example based (numbers based on my own flat )
Property price = 100,000
Annual net Profit === 960 === 7200(rent) – 4800(mortgage) – 720 (maintenance) – 720(management)
Investment === 15,000 === 25,000(deposit) + 5,000(legal etc) + 0K(refurb)
ROI = 12% ( 960 / 15,000 * 100 )
So on a 100K flat with £600 p/m rent and no refurb you should not invest?

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