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Yield Or ROI? Which Should You Use?
Updated: Sep 17, 2021
Gross yield, net yield, return on investment – all this language might be scary and confusing, but it’s really quite simple to work out.
Any investor will use these metrics to measure how investable a property might be.
Some people may well mention other metrics but for me and for 99% of property investors you only need to understand the big three!
Gross Yield – Net Yield – Return on Investment (R.O.I.)
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So how do you work out the big three metrics that tell you if a property is viable as an investment or not? Well let’s start with…
GROSS YIELD
Gross yield = annual income generated by a property, divided by its purchase price.
Example:
Annual rent: £5,000 Purchase price: £100,000 Gross yield = 5%
Gross Yield will give you a very basic understanding of it’s profitability, however it’s not the best way to go! The reason is it does not take into account any costs and so it’s not a true picture of what will happen. You won’t actually generate 5% that figure is before any costs. Always remember that gross is before costs are deducted.
NET YIELD
Net yield is the annual income minus the annual costs, divided by its purchase price.
Example:
Annual rent: £5,000 Annual costs: £1,000 Annual profit = £4,000
Purchase price: £100,000 Net yield = 4%
So what costs could we be deducting from the rental income?
Mortgage payments
Management (letting agent fees usually 8 to 12% per month)
Insurances (buildings insurance, contents insurance if applicable)
Maintenance and Repairs (always wise to factor this in)
Voids (the property being empty)
Service charge and ground rent (if applicable)
So now we have a better (more true to life) measurement, because we accounted for all the running costs you might incur with the property ongoing.
So NET YIELD is a popular and commonly used metric used by many property investors. When you talk yields with investors always be crystal clear that it’s either Net Yield you are talking about or Gross to avoid confusion.
So what about our last of the big three…
RETURN ON INVESTMENT (ROI)
Return on Investment (ROI) is the annual profit (income minus any costs) generated by a property, divided by the actual cash you've put in.
If you bought the property using a mortgage you would likely put in 25% of the purchase price (this is the deposit).
Example:
Annual rent: £5,000 Annual costs: £2,000 Annual profit = £3,000
Purchase price: £100,000 Mortgage used: £75,000
Cash invested: £25,000 ROI = 12%
You might be thinking, wow… 12% looks a lot better than the gross yield – this is because your only putting in 25% of the purchase price as opposed to it being based on 100% of the purchase price.
R.O.I. shows you exactly how hard your capital is working as it’s based on the money in the deal and the profits returned after costs.
SO WHICH CALCULATION SHOULD YOU USE?
Personally I have always preferred using good old, R.O.I. purely because it shows you how hard your money is working.
When all is said and done what you will find is most investors you will encounter, will want to know what the Net Yield is or what the ROI is. People may ask for other metrics such as ROCE