What’s the difference between net and gross rental yields?
The calculation above is used for working out the gross rental yield. This is the rental income a property investor can make before any outgoings or expenses are taken off. It’s important to remember that all rental properties come with costs, like general upkeep and interest rates, which need to be factored into the calculation.
The amount of income return after expenses and outgoings have been subtracted is called the net rental yield. Net rental yield is important because a property might have a high gross rental yield but also high mortgage interest rates, for example, making the return low and resulting in a low net yield.
The net rental yield calculation is similar to the gross rental yield calculation above, however annual expenses are added into the equation. To work this out, start with the annual rent income and subtract the annual expenses and losses, divide this number by the value of the property and multiply by 100.
If we say a property’s value is £300,000, expected rent is £200 a week and expenses/losses are £3000 then the calculation would be:
£10,400 (£200 x 52 weeks) - £3000 ÷ £300,000 x 100 = 2.5
So, the net yield would be 2.5%.
The expenses and losses that affect net yield are:
- Costs associated with the property purchase, e.g. price of the property, loans, legal fees and surveying costs
- Losses due to property vacancy, such as rent and advertising
- Property management or letting agency fees
- Maintenance and repairs
- Insurance
- Rates, e.g. interest rates