3 Ways to Calculate Investment Property Yield & Return (ROI)

Calculate Property Yield

⏱️ 13 minute read

📅 Written on July 31st 2020

Looking to get started as a property investor?

Work your way through our 6 part property investing guide for beginners

Part 1:

 

How to create a property business plan

Part 2:

 

2020 Property Investment Strategies

Part 3:

 

Calculate Yield & ROI on Investment Property

Part 4:

 

Buying Property Through a Limited Company

Part 5:

 

Best HMO Investment Areas in the UK

Part 6:

 

How to flip a house as a property investor

Chapters

Chapter 1

Not working the numbers on a property, could be 🤯CATASTROPHIC. You really should know how to calculate investment property yield.

 

Ok, maybe not that bad. But don’t make an expensive mistake you’ll ✋ regret.

 

You must have seen it on ‘Homes Under The Hammer’?

 

Property novice goes into auction.

 

They pay WAY over the asking price and market value. Then overspend on the refurbishment. 😲

 

Buying a property is meant to be one of the most stressful things you can do. But also extremely rewarding 🥇 at the same time. 

 

Too many new property investors jump into their first deal WITHOUT understanding the numbers.

 

YOU DON’T NEED TO BE A 🧮 MATHEMATICS EXPERT.

 

Knowing the numbers will make you a better investor than 80% of people out there. Seriously. It’s shocking!

calculate property yield

In this guide, I’m going to show you how to work out all the property calculations you need.

 

You’ll learn:

Chapter 2

How to calculate property YIELD

To calculate investment property yield will allow you to understand quickly whether a property you intend to rent out, is good or not. 

 

We’ll look at GROSS YIELD and NET YIELD.

Calculate Rental Yield

Calculating yield on a property is a way to understand quickly whether a property you intend to rent out, is good or not. 

 

We’ll look at GROSS YIELD and NET YIELD.

GROSS YIELD

Gross yield is the total annual rental income generated by the property, divided by the cost.

 

Let’s break that down:

It’s a good way for an ‘at a glance’ 👀 understanding whether a property is good or not.

 

But its also not the best way of looking at a deal. It completely ignores any costs you will encounter 🤷‍♂️ as a buy-to-let investor and landlord. 

 

For example, mortgage costs. Management costs. Voids. Other expenses. 

 

That’s where our good old friend. NET YIELD comes in. 

 

To remember which way round GROSS and NET is, I have a great way 🤓.

NET YIELD

Ok, so looking at our previous example. Lets now add costs to that as well to work out what our PROFIT is.

If the rent is £7000, minus the £2000 in costs. Our NET income is £5000.

There, that’s better!

 

Now we can see what the yield is, now we’ve factored in the costs. 

 

Typical costs could include:

A good investor usually adds a rough % to account for all of these.

Chapter 3

How to calculate RETURN ON INVESTMENT

Property ROI… the holy grail of property calculations.  🙌

how to work out return on investment

Return on Investment (ROI) is calculated by taking the annual NET income (GROSS minus costs), simply divided by all the money you’ve put in. 

 

This figure is particularly useful when using a mortgage, as a large portion of the 🏡 house purchase, isn’t your own money. 

 

Let’s break this down:

To understand another way of what ROI is telling you.

 

It means in one year, how much of your initial money 📈 you make back. 

 

So if I invested £25,000. And made £5000 a year PROFIT. 

 

It would take me 5 years to make all my money back (doubling it). Or 20%. 5 x 20 = 100.

Chapter 4

Return on Capital Employed (ROCE)

How to calculate return on capital employed (ROCE)

This is one you’ve probably not heard of before. 🤔

 

It’s VERY similar to ROI / Return on Investment. But it’s more specific to the overall business. 💼

 

For example, if you had a bigger portfolio of multiple investments. Or in our case, properties. 🏘️

 

I see property investors confusing this, 🤷‍♂️ ALL THE TIME! Or thinking it’s the same thing. It’s really not. They use it on an individual property. Which is basically ROI. 

 

I get they’re similar. But they have different uses.

 

On ROI we use the profit. For ROCE it uses something called EBIT. This stands for Earnings Before Interest & Tax. Big companies use it for understanding the return on capital employed.

 

Unlike the ROCE, ROI is a bit more flexible.  It can be used to compare products, projects and various investment opportunities. 

 

The downfall of ROI is that it doesn’t take the factor of time into account. An investment can have the same ROI and yet one can provide that return in a year. While another takes 2 years. The ROI calculation also doesn’t take into account fees or taxes, which are important for a company’s bottom line. 📊

 

If you had 5 properties, you wouldn’t use ROI to evaluate your entire portfolio or your business. 

 

This is where ROCE comes in.

 

Let’s break this down

This means:

In your whole portfolio, you’re getting a 16% return every year. This is based on the cash tied up in the houses. Versus the rent, they generate as profit.

 

It’s a great way to summarise how your portfolio is performing for you as a whole.

Goal Setting Guide

Free Goal Setting Guide

Are you struggling to find focus in your property business? Do you have a clear, tangible and measurable plan of action? Download this free handy goal setting guide that explores wherey you are today, your financial literal and north star lateral goals – and what you need to do to bridge that gap to meet your goals. 

Chapter 5

What costs do you incur as a property investor?

Now we’re past the beginner’s bit. Let’s introduce some more advanced 🧠 thinking. 

 

There’s a lot of debate out there around how you should truly calculate ROI. A novice investor may work out a rough profit. Some include a 10% maintenance⚒️. Some don’t.

 

As you can see, it’s quite subjective. 🤷‍♀️

 

Everyone has their own idea of what allowance to use for voids in a property. Similarly for maintenance/repairs. 

 

Some investors use a lettings agent. Some self manage. 

 

The key is being consistent as yourself to help you compare your own deals. If you see someone on Instagram boasting a 40% ROI. Remember they may have worked it out differently.

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wtfpropertyinvesting1.4K followers🏡 What The Flip: Property Investing 🏗️ S. Yorkshire 👇 YouTube & Newsletter 🌿 Giant Leaps Begin with Small Steps
2
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#7daysofproperty DAY FIVE – Highlight of 2020 🚀Starting a YouTube channel YouTube.com/mattbrighton📽 Kind of property related – I launched a YouTube channel this year, it’s something I’ve always wanted to do but never quite found the right topics to talk about. It clicked this year that I really wanted to document the property happenings, the things I learn and share my journey with others so they are inspired to get started.🤯 After only 2 full months the channel has already gained 220 subscribers and is growing faster than I anticipated, but subs aside, I’m enjoying putting out helpful content and have had so many lovely DM’s and comments thanking me for tips that people have picked up and things they’ve learnt which is awesome to know that already the content is having an impact.😃 I just released my latest video on buying a £600k flat in London at 25 with numbers, details and my story.👉 Feel free to check it out! Link in bio or YouTube.com/mattbrighton#hmo⁠ #coliving⁠ #property⁠ #properties⁠ #propertybusiness⁠ #propertydevelopment⁠ #propertydeveloper⁠ #propertymanagement⁠ #ukproperty⁠ #propertyinvestment⁠ #propertyinvestor⁠ #propertyinvesting⁠ #propertypodcast⁠ #buytolet⁠ #landlord⁠ #financialfreedom⁠ #passiveincome⁠ #propertyladder ⁠ #ukpropertymarket⁠ #propertynews⁠ #propertymarket⁠ #business⁠ #entrepreneur⁠ #propertymanagement⁠ #entrepreneurship⁠ #entrepreneurlife⁠ #houseofmultipleoccupancy ⁠ #sharedhouse⁠ #spareroom⁠
5
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#7daysofproperty DAY THREE – WHY 🚀🤷‍♂️Why did I get into the industry?I’ve always wanted to build a business and after studying graphic design at university I always thought about running a design studio. The problem in 2020 is that everyone can create basic stuff on photoshop, canva etc. The agency market is also super saturated.For me, property is a great way to be creative and expressive whilst at the same time, the product in its self is an investment that gains value over time.🥸 Escaping The Corporate LifeI have a great career in a bank but it’s not what I’d prefer to do for the next 40 years commuting into the city. I want the space, freedom and most importantly a golden retriever 😂. Creating a property business and content brand are my two creative outputs to create something that is mine where my efforts are directly awarded through the performance of the businesses I run.🤩 What does it allow?For me, the why really stems down to building something of my own and being incredibly proud of it. A business that I can enjoy working hard on, to the point where it doesn’t feel like ‘work’. And ultimately that allows me to make decisions when I want time off, how I use my time and protect myself in later years when I’m retired.#hmo⁠ #coliving⁠ #property⁠ #properties⁠ #propertybusiness⁠ #propertydevelopment⁠ #propertydeveloper⁠ #propertymanagement⁠ #ukproperty⁠ #propertyinvestment⁠ #propertyinvestor⁠ #propertyinvesting⁠ #propertypodcast⁠ #buytolet⁠ #landlord⁠ #financialfreedom⁠ #passiveincome⁠ #propertyladder ⁠ #ukpropertymarket⁠ #propertynews⁠ #propertymarket⁠ #business⁠ #entrepreneur⁠ #propertymanagement⁠ #entrepreneurship⁠ #entrepreneurlife⁠ #houseofmultipleoccupancy ⁠ #sharedhouse⁠ #spareroom⁠
25
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#7daysofproperty👋 Hey everyone. Looking forward to another week of @insidepropertyinvesting 7 day challenge!🙋‍♂️My name is Matt, I’m originally from the north, however I have been living in London for just over 5 years. I work for a bank by day and spent a bit of time working in commercial lending so have seen the side that many have not when it comes to financing a business.🏡 I’m a brand new investor. I got the bug after buying my own flat in London and renting out the spare room. Having a lot of knowledge in the South Yorkshire area, I’m viewing properties next month with the hope of working on flips to eventually move onto a mixture of HMO, commercial to resi & mixed use and would love to build houses further into the future.📽 With quite a creative background, having a degree in graphic design and working in finance. I’m also documenting my journey and knowledge through a YouTube channel (YouTube.com/MattBrighton). The insta community is amazing but it’s far too easy to see other investors killing it with amazing projects and 10 years experience so I’m enjoying ‘being an amateur’ in public and showing my work which has resonated really well with a lot of people so far.I look forward to meeting others on the challenge! ⁠ #hmo⁠ #coliving⁠ #property⁠ #properties⁠ #propertybusiness⁠ #propertydevelopment⁠ #propertydeveloper⁠ #propertymanagement⁠ #ukproperty⁠ #propertyinvestment⁠ #propertyinvestor⁠ #propertyinvesting⁠ #propertypodcast⁠ #buytolet⁠ #landlord⁠ #financialfreedom⁠ #passiveincome⁠ #propertyladder ⁠ #ukpropertymarket⁠ #propertynews⁠ #propertymarket⁠ #business⁠ #entrepreneur⁠ #propertymanagement⁠ #entrepreneurship⁠ #entrepreneurlife⁠ #houseofmultipleoccupancy ⁠ #sharedhouse⁠ #spareroom⁠

Chapter 6

Is the stock market better than property?

Good question. And I shall answer it. ☝️

 

Let’s not forget about capital growth. And that’s just on your deposit, that’s on the entire property. 🔥

 

For example, if you invested £30,000 and got a 20% return. You’d have £36,000 after one year.

 

Put that £30,000 onto a house and you could purchase a property with a mortgage up to £120,000.

 

Let’s say you got a healthy 10% capital growth in a year on your property. That’s £12,000 capital growth just while the property EXISTS! Then you can factor in rental profits or flip gains. 🏡

 

Stop and think about that for a second. 

 

And… that’s the beauty of investing in property. Compared to putting it into a bank at 1% a year. It’s a no brainer. 

 

So you get capital growth PLUS the profits from rental income. As usual, there are no guarantees. A property could go down in value. So do your homework.

Chapter 7

How much tax do you pay on a buy-to-let property?

Speak to an accountant or tax professional to get proper advice.

 

This really depends whether you operate with property in your own name. Or through a limited company. It massively depends on how much you earn a year. 

 

I’m a higher rate taxpayer. And I want to build a portfolio and use rental income to re-invest. For me, it makes sense to operate through a limited company. This means a very different tax treatment compared to owning property in your own name. 

 

Tax is incredibly complicated, I’m by no means an expert. So I’d suggest speaking to a registered professional about your own personal affairs. 🧮

Chapter 8

Summary

There are a few different ways to calculate your deals. I promise, if you use the above calculations. You are already ahead of most amateur property investors.

 

By understanding and using these, you’re showing business sense. Risk management. And financial understanding. 

 

You’ll be able to better protect your money. And ensure it stretches and works harder for you. 

 

Always remember there’s 3 calculations depending on what you’re strategy is. 

 

  • – NET Yield to compare property profitability once rented
  • – ROI to get a solid idea of how hard your money works. 
  • – ROCE to evaluate your entire portfolio. If you have more than 1 property. 

 

There’s no hard and fast rule as to what determines a ‘good’ deal. That’s really for you to set. 

 

You’re not likely going to find a 40% ROI on a small buy-to-let in Liverpool. Usually, 10% is the going average. But it also depends on what strategy you use. 

 

I created a guide on making your property business plan and strategy. I highly recommend going through this to work out what’s best for you. 

WTFPROPERTYINVESTING1.4K followers🏡 What The Flip: Property Investing 🏗️ S. Yorkshire 👇 YouTube & Newsletter 🌿 Giant Leaps Begin with Small Steps
2
41
#7daysofproperty DAY FIVE – Highlight of 2020 🚀Starting a YouTube channel YouTube.com/mattbrighton📽 Kind of property related – I launched a YouTube channel this year, it’s something I’ve always wanted to do but never quite found the right topics to talk about. It clicked this year that I really wanted to document the property happenings, the things I learn and share my journey with others so they are inspired to get started.🤯 After only 2 full months the channel has already gained 220 subscribers and is growing faster than I anticipated, but subs aside, I’m enjoying putting out helpful content and have had so many lovely DM’s and comments thanking me for tips that people have picked up and things they’ve learnt which is awesome to know that already the content is having an impact.😃 I just released my latest video on buying a £600k flat in London at 25 with numbers, details and my story.👉 Feel free to check it out! Link in bio or YouTube.com/mattbrighton#hmo⁠ #coliving⁠ #property⁠ #properties⁠ #propertybusiness⁠ #propertydevelopment⁠ #propertydeveloper⁠ #propertymanagement⁠ #ukproperty⁠ #propertyinvestment⁠ #propertyinvestor⁠ #propertyinvesting⁠ #propertypodcast⁠ #buytolet⁠ #landlord⁠ #financialfreedom⁠ #passiveincome⁠ #propertyladder ⁠ #ukpropertymarket⁠ #propertynews⁠ #propertymarket⁠ #business⁠ #entrepreneur⁠ #propertymanagement⁠ #entrepreneurship⁠ #entrepreneurlife⁠ #houseofmultipleoccupancy ⁠ #sharedhouse⁠ #spareroom⁠
5
77
#7daysofproperty DAY THREE – WHY 🚀🤷‍♂️Why did I get into the industry?I’ve always wanted to build a business and after studying graphic design at university I always thought about running a design studio. The problem in 2020 is that everyone can create basic stuff on photoshop, canva etc. The agency market is also super saturated.For me, property is a great way to be creative and expressive whilst at the same time, the product in its self is an investment that gains value over time.🥸 Escaping The Corporate LifeI have a great career in a bank but it’s not what I’d prefer to do for the next 40 years commuting into the city. I want the space, freedom and most importantly a golden retriever 😂. Creating a property business and content brand are my two creative outputs to create something that is mine where my efforts are directly awarded through the performance of the businesses I run.🤩 What does it allow?For me, the why really stems down to building something of my own and being incredibly proud of it. A business that I can enjoy working hard on, to the point where it doesn’t feel like ‘work’. And ultimately that allows me to make decisions when I want time off, how I use my time and protect myself in later years when I’m retired.#hmo⁠ #coliving⁠ #property⁠ #properties⁠ #propertybusiness⁠ #propertydevelopment⁠ #propertydeveloper⁠ #propertymanagement⁠ #ukproperty⁠ #propertyinvestment⁠ #propertyinvestor⁠ #propertyinvesting⁠ #propertypodcast⁠ #buytolet⁠ #landlord⁠ #financialfreedom⁠ #passiveincome⁠ #propertyladder ⁠ #ukpropertymarket⁠ #propertynews⁠ #propertymarket⁠ #business⁠ #entrepreneur⁠ #propertymanagement⁠ #entrepreneurship⁠ #entrepreneurlife⁠ #houseofmultipleoccupancy ⁠ #sharedhouse⁠ #spareroom⁠

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