Property Investors’ Guide: When your yield is not your yield
April 22, 2013 Leave a comment
Many property investors would have come across the yield calculation which takes into consideration very few parameters when considering the yield. It is so strange that no one seems to question why those calculators (online) and financial advisers alike always say your yield is:
- (Rental Income per month * 12 months ) / Purchase Price, where the purchase price is the property value or the amount you agree to buy the property for.
In some cases, the aforementioned yield will be accurate. One of those cases, would be when the purchase price is all you have paid for the property and there are no associated fees as listed below:
- Legal i.e. L
- Stamp duty i.e. SD
- Service charges i.e. SC per year
- Mortgage costs i.e. MC
- Total mortgage repayment i.e. TMR over the life of the mortgage
- Financial advisory cost i.e. FAC
- Other acquisition costs i.e. OAC, which may include cost associated with viewing etc.
- Estate agency i.e. EA costs for managing the property for 12 months
- Maintenance costs i.e. MC
- Tenant acquisition cost i.e. TAC
The real purchase price i.e. RPP of the property = L + SD + TMR + FAC + OAC.
Therefore, your net yield is:
- (Rental Income * 12 months – SC – EA – MC – TAC) / RPP
Indeed, it is too significant to ignore the total mortgage repayment (TMR) in the yield. However, for cash buyers who are not dependent on a mortgage or any form of loan, the TMR for them will be significantly lower. Furthermore, ignoring the TMR is akin to off balance sheet record keeping. However, there are several arguments against the use of the TMR in the calculation of the yield.
In conclusion, the net yield should be the basis for comparison to other investment opportunities. For those who are not keen on the income and only interested in the capital appreciation, the net yield may not be of any interest.