Property investing can be a great way to generate income and build wealth over time. One important aspect of property investing is understanding yields. In this article, we will discuss what yields are, the different types of yields, and how to calculate them.
A yield is a measure of the return on an investment, typically expressed as a percentage of the initial investment. In the context of property investing, yields refer to the annual income generated by a property as a percentage of the property's value. There are several different types of yields that investors should be aware of, including gross yield, net yield, and cash-on-cash yield.
The gross yield is the most basic type of yield and is calculated by dividing the annual rental income by the property's value. For example, if a property is worth £200,000 and generates £20,000 in annual rental income, the gross yield would be 10%. This yield is useful for comparing different properties, but it doesn't take into account expenses such as property management fees, mortgage payments, and other costs associated with owning a property.
The net yield is a more accurate measure of a property's return on investment and takes into account all expenses associated with owning a property. It is calculated by subtracting all expenses from the annual rental income, and then dividing the result by the property's value.
The cash-on-cash yield is another important yield to consider. It is calculated by dividing the annual cash flow (rental income minus expenses) by the total cash invested in the property. This yield measures the return on an investor's cash investment, rather than the property's value. It is an important metric for investors who pay cash for a property or who have a significant amount of equity in the property.
When evaluating a potential property investment, it's important to consider the potential yields and compare them to other investment options. However, it's important to keep in mind that yields can vary depending on factors such as location, property condition, and the current market. In addition, it's important to remember that property investing is a long-term investment and that the yields may fluctuate over time.
In conclusion, yields are an important aspect of property investing and can provide insight into the potential return on investment. By understanding the different types of yields, such as gross yield, net yield, and cash-on-cash yield, investors can make more informed decisions about property investments. It's important to keep in mind that yields can vary depending on a number of factors and that property investing is a long-term investment.