Wednesday, 16 September 2015

Comparing Sunderland Property Gross & Net Yields

The standard method I've used on this blog for comparing the a return on property investment is Gross Yield, as it's simple and easy to understand...a £6,000pa return (£500pcm) on a £100,000 property gives 6% Gross Yield

Gross Yield is simply calculated by dividing the annual rental return (before costs) divided by the cost of the property


I use this method on the blog as it gives an easy to understand way of comparing one property against another but it doesn't give a true reflection of the cash you'll be left with at the end of the month

As a rule of thumb I'd rarely promote a property as a decent investment in Sunderland unless it achieved at least 6% Gross Yield

Net Yield is calculated by taking all the costs out so gives a much more detailed of whether a property is likely to give positive or negative cashflow, but given costs are variable between each property and each investor's circumstances are different, it simply can't be used on something like a blog post without detailed knowledge of the cost of finance, letting & management costs, voids, insurances, maintenance etc for each property

One useful method of comparing investments using Net Yield is to look at the 'Cashflow Neutral' position, that is to find the where the Net Yield is zero - then walk away from the 'Cashflow Negatives' and give consideration to the 'Cashflow Positives'

You'll never know the exact costs for each property to work out the exact Net Yield 'Cashflow Neutral' position but there are ways to work out a reasonably robust estimate based on some common sense assumptions relating to the most common costs

For this excercise I've based the figures on a property investment that cost £100,000 and achieves £500pcm rent 

Cost of Finance
Clearly mortgage rates will vary, from 0.5% for older rates linked to the Bank of England base rate to 5% or 6% for more recent, longer term Fixed Rates - let's call it 5%

Management Fees
Management Fees of 12%+VAT on a £500pcm rent works out at £864 per year or 0.864% based on a £100,000 property - let's round that up to 1% to be on the safe side and include change of tenancy fees etc

Maintenance & Contingency
How do you estimate how much to allocate for maintenance? How long is a piece of string? I always advocate it's sensible practice to put 10% of the monthly rent aside for maintenance & unforseen issues, so that's £600pa or 0.6%

Insurance & Regulations
As legislation gets more & more onerous and Landlords are expected to comply with more regulations these costs will increase but for now it will be reasonable to budget 0.4% for Insurance, CP12's etc

Voids
Offer a Good Quality property at a sensible rent and voids shouldn't be too much of an issue but it's worth basing voids on a worst case scenario of 1 void month per year, so £500 or 0.5% of a £100,000 property

Add all of these together and you get to 7.5%, so based on the above rough guide any property which returns less than 7.5% Gross Yield will be 'Cashflow Negative' and will end up costing you money each month as the cost exceed the rental income, anything above 7.5% will be 'Cashflow Positive' and you make money each month

Clearly those paying a much lower mortgage rate should adjust their figures accordingly, as this will be the most significant factor affecting the above break even point

Of course comparing Gross or Net Yields is just one way of evaluating the worth of a property investment so it may be that a property that offers scope for decent Capital Growth potential looks to make a worthwhile investment even if it looks to be slightly 'Cashflow Negative' - this is likely to be the case in the more affluent areas such as the South East or Central London

If you would like to have a more detailed discussion about evaluating property investments in Sunderland give me a call on 0191 567 8577 or email neil.whitfield@belvoirlettings.com





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