When deciding whether a property is a good rental investment or not, the best place to start is by calculating the yield. There are two main types of yield usually considered when investing in property, the Gross Yield and the Net Yield.
The Gross Yield Is the annual income generated by the property (the total rent) / the price of the property x 100.
For example Annual rent £12,000 / Purchase Price £200,000 x 100 = Gross Yield 6%
The advantage of the gross yield is that it can be a quick and easy calculation which allows you to compare properties quickly. But it’s not that helpful as it doesn’t take costs into consideration.
Net Yield is the Annual Profit (Total Rent minus Yearly Costs) / Purchase Price x 100
Eg. Annual Rent (£12,000) minus property costs of £3,000 divided by the purchase price of £200,000 x 100 = 4.5% Net Yield.
Those costs may include, letting agent costs, service charge, mortgage interest, etc. This gives us a much bigger picture about your return on investment.
Calculating the Gross or Net Yield is a great starting point to assessing a potential property deal.