How this number is made
Gross yield is a year of rent divided by the price. Net yield subtracts the costs of holding the property that are not the loan: repairs, insurance, local tax, and the agent. It is the first screen, not a full investment memo.
- Use the price you would pay, including what you cannot borrow, if that is the cash the yield has to justify. Or use the purchase price alone and stay consistent.
- Rent is the rent you can collect, not the asking rent on a slow street.
- Leave the mortgage out of owner costs. Then you can compare two buildings before you choose a loan.
Formula
Gross yield = (monthly rent × 12) ÷ price. Net yield = (monthly rent × 12 − yearly costs) ÷ price.
Worked example
A £250,000 purchase let for £1,500 a month brings in £18,000 a year. Gross yield is 7.20%. £3,000 of owner costs leaves £15,000, a net yield of 6.00%.
Questions
Should the mortgage payment come off the yield?
Not in this ratio. Yield describes the property. The mortgage describes the loan. Mixing them makes a leveraged deal look like a better building than it is.
What about empty months?
Not included. One empty month is a twelfth of the rent gone. Type 11 months of rent as the monthly figure times 11, divided back into a monthly average, if you want that haircut.