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How to calculate net rental yield

By Josh GoundryPublished Updated

This is a Phase 3 fixture article (see site/README.md). It is written in MDX rather than Markdown specifically to prove work item C5: a React island embeds in an article, and ships JavaScript to that article only.

The method

  1. Take the annual rent — the monthly rent multiplied by twelve.
  2. Reduce it for expected void periods.
  3. Subtract every recurring cost of holding the property.
  4. Divide the result by the purchase price, including stamp duty and fees.

Try it

Net yield 4.11%

The figure this produces is comparable between properties in a way a listing’s headline yield is not, because it is calculated against what you actually paid rather than against what the property is currently said to be worth.

Step by step

  1. Work out the annual rent

    Multiply the monthly rent by twelve. Use the rent actually agreed in the tenancy, not the figure the property was advertised at.

  2. Reduce it for expected voids

    Take a percentage off for the weeks you expect the property to stand empty between tenancies. Two weeks a year is roughly four per cent.

  3. Subtract the running costs

    Letting and management fees, buildings insurance, a maintenance allowance, ground rent and any service charge. Mortgage interest is deliberately excluded — net yield measures the asset, not the financing.

  4. Divide by what you paid

    Divide the result by the purchase price including stamp duty and fees, then multiply by a hundred. That is the net yield.

Frequently asked questions

Which costs belong in a net yield calculation?
Every recurring cost of holding the property — letting and management fees, buildings insurance, maintenance and a repairs allowance, ground rent and service charges, and an allowance for void periods. Mortgage interest is deliberately excluded, because net yield measures the asset rather than the financing.
How should void periods be handled?
As an annual percentage reduction in rent rather than as a cost line. Two weeks' vacancy a year is roughly a four per cent reduction, and applying it to rent keeps the calculation comparable between properties let on different terms.

Sources

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