You can use ‘yield‘ as a way to compare different classes of assets so that you can decide which to invest in and how one is performing against another. The ‘yield’ on a share is the dividend that the share pays. The yield on a deposit account is the paltry rate of interest that the bank pays you but this interest or yield can rise and fall over time. Fine art delivers a yield of sorts in the enjoyment you can get whilst you own it but like vintage case and wine you tend to get the yield at the end when you sell it. Property can be let out and commercial property often is which is why calculating the yield is a staple part of evaluating a shop, office or a distribution warehouse in Nottinghamshire!
Of course most people buy a house to live in but this does not preclude the savvy buyer from looking at the notional yield when evaluating a property just as an investor would when considering a ‘but-to-let’.
You simply take the rent you could expect each week/month, multiply it by 52/12 and divide the result by the capital value or asking price. If you are going to do this a lot then inevitably there’s an App for this.
A bank will give you up to 3% if you put your money in their deposit account. The Post Office are offering 2.25% gross and up to £1m is protected by the Government. Last year VodaPhone paid 5.78% return but unlike the deposit account the capital value of the share can fall just as we hope it can rise.
When it comes to residential property shrewd investors look for 6%+. This gives some reward for the risk of falling values, of the costs associated with letting (agent fees, management fees, dilapidation’s, voids, interest…). Subtracting all these costs takes a gross yield down to a net yield.
The countries biggest estate agent published their latest letting update. In it Countrywide claim that of the 56,000 homes bought and let by them they saw an average gross yield of 6.2% across the UK. This will have included all those parts of the country where capital values are falling – you’d want a decent yield to compensate for falling values!
Interestingly, a Countrywide subsidiary John D Wood & Co. published their January market update this week. In it they included a revealing graph of the current yields on houses and flats in London which they have kindly allowed me to reproduce here. As you can see, it makes depressing reading unless your investment strategy is based on trying to minimise the impact of inflation in which case some return is perhaps better than a negative return as the values of cash and assets are all falling.
Assuming that a market rent is being used in the calculation a property which shows a yield of 2% (net let alone gross) in my opinion is clearly over-priced. There are only two ways to increase the yield – increase the rent that is paid or lower the capital value. Whilst many sellers have an asking price that reflects a pitiful yield buyers should remember that sale prices are almost always lower even if the selling agent is embarrassed to admit it.
So, when you are trying to decide if a property is fair value calculate the yield. The selling agent will usually help you with a market rent and you can do the maths. If the seller won’t accept an offer based on a 5% gross yield then you need to decide just how much you love the property. Buying with your heart rather than your head is like falling in love with your spouse, a romantic idea that most of us do despite that knowledge that 44% of marriages end in divorce.