Calculating Which Property Is The Wiser Investment

As a landlord, or a wanna-be landlord, have you ever been torn between multiple properties? A landlord’s main concern should be buying the property which will get the best return. Because let’s face it, it’s all about the money!

Example scenerio
John wants to be a landlord, so he’s on the hunt to buy a property. John has seen 2 properties he likes. Property 1 costs 150,000 with a potential rental return of £600pcm. Property 2 costs £180,000 with a potential rental return of £775pcm. Which is the better buy?

The formula to work this out is quite simple. It basically boils down to “rental yield”

What is rental yield?

Rental yield is the amount of money a landlord receives in rent over one year, shown as a percentage of the amount of money invested in the property.

The higher the yield, the better.

Calculating rental yield

The formula:
mrr = monthly rental return
i = investment

Yield = mrr*12/i*100

Rental yield for Property 1

Monthly rental return = £600
Investment = £150,000

£600 * 12 = £7,200
£7,200 / £150,000 = 0.048
0.048 * 100 = 4.8 % yield

Rental yield for Property 2

Monthly rental return = £775
Investment = £180,000

£775 * 12 = £9,300
£9,300 / £180,000 = 0.0516
0.0516 * 100 = 5.16 % yield

Conclusion

Although property 1 costs less to buy, property 2 has the better return.

What is a good return yield percentage?

Will, it’s actually a subjective issue. I personally think any property which has a return yield of 7%+ is extremely good. I certainly wouldn’t put my nose up at a property which generates that kind of yield.

Rental Yield Calculator

To make life easier (because that’s what I’m all about), you can use the yield calculator below.

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Talk / 4 Comments

daz wrote this on 2009-11-14 22:49:04 The calculator is not working, tried in both ie and firefox 1

The Landlord wrote this on 2009-11-15 09:18:29 Hi,
Many thanks for informing me.
I've now fixed the calculator.

Kind regards. 2

dvdfrost wrote this on 2009-11-30 14:58:09 Great calculator!
so i have a yield of 9.615
but no one will give me a remortgage!!!!
God bless the banks 3

Matt wrote this on 2010-01-05 10:46:56 Hi there,

Thanks for the very useful tool

As many landlords (including myself) will not be buying properties with 100% cash, how do you incorporate mortgage costs when deciding yield?

Do you subtract your mortage service costs from the rental income?

And how do you reflect the difference between interest only and repayment? Do I still need to calculate some form of cost for a repayment vehicle if I use interest only?

Many thanks

Matt 4