How to calculate the Net yield on a buy to let property investment.
Our previous article explained how to calculate the Gross Yield on a Buy to Let property investment, but the Gross Yield is not the most important factor you need to take into consideration when looking at purchasing a buy to let property.
Net yield on a buy to let property investment is a much better metric to base your decisionson. Net yield calculations use the Net Income, rather than the Gross income for a property.
To calculate the Net income for a BTL property, take the monthly rental figure and deduct all of the costs, including the letting / estate agent’s management fees (typically 10 – 12 % of the monthly rental + VAT) , service charges and ground rent for leasehold flats, building and content insurance, repairs and maintenance including replacement fixtures and fittings.
In Scotland may flats / apartments also have Factor’s fees. These are management fees for looking after repairs to the common areas of a flat, e.g. roofs, security doors and communal areas. Quite often the factor fees included building insurance which means you don’t have to take out separate landlord’s building insurance, but you may still require contents insurance. (Many landlords insurance policies also include public liability insurance so are worth the investment).
So for our previous example of a £45,000 property with a monthly rental of £350, the Net Yield is as follows:
|Gross Monthly Rent||£350|
|Monthly Letting agent fee||£42|
|Net Monthly Rent||£278|
|Net Annual Rent||£3,336|
|Property value or cost||£45,000|
|Net Annual Yield||7.41%|
Overall, 7.41% is still a good rate of return, based on interest rates in late 2012