Calculating Property Investment Returns
Return figures for property are often quoted loosely. Gross yield looks better than net yield; capital growth projections can be optimistic. Accurate calculation leads to better decisions.
Gross Yield
Formula: (Monthly rent x 12) / Purchase price x 100
Example: £150,000 property renting at £700/month = £8,400/year. Gross yield = 8,400 / 150,000 x 100 = 5.6%. Useful for comparison but ignores all costs.
Net Yield
Deduct annual operating costs: letting agent fees (10 to 15% of rent), maintenance (budget 1% of property value per year), insurance (£200 to £400), safety certificates, void periods (assume 4 weeks per year). Total costs on a £150,000 property typically run £3,600 to £4,200 per year before mortgage.
Net yield before mortgage: (£8,400 minus £4,000) / £150,000 x 100 = approximately 2.9%.
Cash-on-Cash Return
Measures annual cash profit as percentage of cash invested (deposit plus buying costs). At current mortgage rates (5.5%), highly leveraged BTL properties often produce negative monthly cash flow — relying on capital growth for the total return thesis.
Stress Testing
Any property should be assessed at higher costs and lower income. What if the mortgage rate increases by 1.5%? What if void periods extend to eight weeks? What if a major repair is needed in year two? A property that barely covers costs in normal conditions will generate real losses under stress. Good investors build cash reserves of 6 to 12 months of rental income per property.
