Let’s Calculate the Correct Yield and ROI for YOUR Property… LIVE!

Well, good morning everybody and welcome to another episode of the Anonymous Landlord, and today, we’re going to do something a little bit different. 

We’re going to calculate the correct yield and the correct return on investment for your property, live Mr. and Mrs. Landlord and the reason for that is because everybody get this bit- gets this bit wrong and it can lead to some pretty bad Investments. It can stop you from finding good property investment deals and it can lead to making no profit from an investment. 

So I’m going to go through the correct calculation for your actual yield and your actual return on investment. And remember, we’re going to try and look for about 10% or more return on your investment 10%. 

Now, a lot of you are already thinking. Wow, that’s, that’s pretty high if certainly, if you’re in parts of the South and you’re thinking, that’s a better big number, ten percent, but that’s what we’re going to be looking for to make a good decent investment. That’s the absolute minimum that I would even even look at or consider. 

Now I want to do this because I’ve had a load of discovery calls over the last, however many months with a lot of property investors or people that want to get into property investing and they want to start making profit in property and the yield question comes up all the time. 

So, by the way, comment below with your own figures, with your own rent, with your own purchase price, with your own figures about your property and we’ll go along with it and see what everybody else is doing. So, comment below and you know what? People either cut, they calculate it correctly sorry incorrectly which means that they don’t get the good property deals or they end up buying properties that don’t make a good profit. So we need to clear this up so that you could invest well. And by the way, if you want me and my team to find you, those property deals, then comment below or message me and we’ll set up a call and see if we can help. 

Now, quick disclaimer, this is all about buy-to-let and flip to let or buy refurbish refinance. This is not about service accommodation, HMOs, or rent to rent service to all of those sort of flips, build to rent. This is all about buy-to-let property investments. 

I like buy to let property investments, you can make good profit from them, if you buy them correctly and there’s a real safety net around straight out buy to let’s and anybody that tells you the buy-to-let is no good or buy-to-let is dead. Then they’ve even got a training course, that they want to sell you or a master class they want to sell you or maybe they’re not so skilled themselves at finding the right off-market,  property deals, probate deals, all that sort of stuff or they don’t really know how to use the buy-to-let market for profit, or maybe they’ve invested badly, and they’ve been put off, maybe they’ve calculated the wrong yield and they’ve been put off by forever investing before or maybe they’ve just been dazzled by the bright lights of HMO and service accommodation. Anyway, I’m not saying it’s a bad thing, I’m just saying this is not about that. 

So let’s go now, first of all, let’s look at the wrong way to calculate your yield, which is also the most common way and that is the annual rent divided by the purchase price. 

Now even estate agents calculated like this. It’s absolute Madness. I cannot get my head around how you could be in property as your profession and calculate the simplest of calculations incorrectly. 

So estate agents. If you ever get to watch this, you need to listen because you need to be able to tell your investor clients exactly what yield a property is going to generate, and by calculating the wrong yield, which again, is the annual rent divided by purchase price. Then you end up looking for properties that are going to get, I don’t know, five or six percent yield because that’s what that calculation tells you. 

Now. Mm, that might be different in other areas by the way, but it’s wrong, and it’s misleading. So if you’re using that calculation, then pay attention. We’ll try and get that right now and for an example that incorrect way of working out some people call it gross yield, some people call it gross rent income, blah blah blah blah. 

If you take the example I’m going to use across all of this is a 100,000 pound purchase price so you can now just adapt that to where you are. So if your property prices are higher just change that purchase price but change everything else along with it. 

So 100,000 pounds purchase price, 500 pounds per month rent that’s 6,000 pounds per year. See how I did that nice and easy. 

Now that works out to be a six percent yield if you calculate it the old way, the incorrect way as grocery up. So no, that’s not correct. It’s not a six percent yield. 

Now, the actual yield for most people, that specific example is about 11%. That’s a hundred thousand pound purchase, 500 pounds a month in rent 6,000 pounds a year. 

Now, you’re probably wondering how I worked out. Well, that’s why I’m doing this live right now is because I’m going to go through it with you live so that you can see exactly how that actual yield is calculated. 

So hopefully you’re all with me. Hopefully you got your pens and if we look at it like this and by the way, put your own figures in the comments below, your purchase price, your rent, you don’t have to share the address or anything like that. Just put your purchase price and the rent in there and we’ll see how we go. 

So if you’re going to buy a property for a hundred thousand pounds 100,000 pounds and you’re going to use a mortgage to buy that property, then the bank is going to be putting in 75,000 pounds and you’re going to put in a deposit of 25,000 pounds, all agree with that. I think that’s fairly simple. Then you need to add in things like your fees, for survey, stamp duty, legal costs. 

So let’s just say you’re going to put another five grand in for all of those fees. So now your cash requirement, the cash investment that you’re going to use is 30,000 pounds. You all agree with that? Purchase price, a hundred thousand pounds, the bank are putting in 75,000 pounds 75 percent, you’re putting in a deposit of 25,000 plus fees, survey, stamp duty 5, another five grand. Let’s just say, so you’re putting in 30,000 quid of your own money.

So then we need to work out the return on that investment. Because now, we’ve all understood that your personal cash investment is 30,000 pounds. So, the return on that investment is the net profit that that investment generates, not the purchase price because you’ve only used 30,000 pounds of your own money. The bank have invested 75,000 pounds and they will calculate their return on investment but that’s not yours. That’s not your investment. That’s not your return on investment. 

Now, don’t forget, when you’re calculating your net profit from your rent, then include everything and loads of people miss most of this stuff, but I’m going to keep it fairly simple for this calculation. 

So your cash investment is 30,000 and your property is going to generate 600 pounds per month in rent a sorry 500 pounds per month in rent. I’ve written the wrong number there, 500 pounds per month in rent is 6,000 pounds per year, all agreed awesome. 

Now. So if you’re going to generate 500 pounds a month but you’ve bought that property with a mortgage then there is going to be mortgage payments of, let’s just say 200 pounds a month, plus there’s going to be management costs. If you’re a smart landlord and you’re having a good letting agent manage that property for you, that’s going to cost you about 60 quid a month. 

Then you’ve got your insurance. Now generally, speaking your insurance is let’s just say 20 pounds a month. I’m putting these figures in just so that it will make sense and I will calculate it all at the end so don’t worry if you’re frantically writing down, but we also need to forecast for maintenance. 

Now, the way I work that out is 8% of my rent is allocated for maintenance and repairs and that’s things like your annual gas safety certificate when you have have to send a plumber out to the property because I don’t know the pilot light on the boilers gone out that’s a another little bit here and there. 

Now, I’ve worked that out across all of my, letting agencies properties on average. What is the cost involved in maintenance and repair? Generally, speaking, that is correct, but it might be more it might be less. If it’s more you’ll just have to take it on the chin. If it’s less, anything you haven’t spent goes straight into your profits. So that works out to be about 50 Quid a month that I’ve allocated to maintenance and repairs. 

So all in all, 200 pound for the mortgage, 60 pound for management, 20 pound for insurance, 50 pound for maintenance. Now that gives me a pre-tax profit, I’m not going to include tax because some people have individual property, some people have a limited company, some people have it in trust, there’s loads of different tax incentives. 

If you want me to connect you with my personal accountant and tax advisor then I will. I don’t charge anything for that. I just want to help everybody out. Make sure everybody, but everybody gets it right, either comment below, send me a message or send me an email Tom@Pinkstreet.CO.UK and I’ll just connect you up by email with, with my accountant if you need some advice. Anyway. 

So your pre-tax profit is going to be about 270 quid, which is about 3,300 pounds per year roughly speaking. I’m just rounding figures up here, 3,300 pounds per year that you are gonna get as net profit against your thirty thousand pounds that you invested. 

So 30,000 pounds, investment 3,300 pounds profit per year, that’s eleven percent Does that all make sense? I hope so and don’t forget to comment below with your numbers with your, what’s your purchase price and rent, just to see what everybody else is doing and hopefully, you’re all with me. Let me know if you’re all with me. Give me a like or a thumbs up or comment. Just to let me know that this is all making sense so far. 

So that’s 11 percent. Your investment is 30,000 and your net profit per year is 3300 pounds and that should give you a nice 11% return on your actual investment in that property but there is more now, this is where people also get it wrong. A lot of people do you know, there are a lot of people that do calculate yield and return on investment correctly but they miss out a massive chunk of what that return on investment can be. 

So there is more if you bought that property below market value in the first place. If you bought that property but added value, if I mean look I could go through a ton of different strategies and in fact, I do go through a lot of value, adding strategies in my growth webinars because there’s loads of ways to get that right, there’s loads of ways to get it wrong. 

So I go in my webinars, I go through some ideas and some strategies about how to increase the value of a property without losing money. That’s a really good way to look at things anyway, but so you either added value. You’ve bought it below market value or property prices have gone up over the next couple of years. Either way, you’re going to be able to release that Equity, that you’ve accumulated. Whether that be through, adding value, property prices, buying it below market value. There is equity there for you and the equity by the way, is the difference between the value of the property and the amount that you owe to say the mortgage company, that’s your equity and that’s your money. 

So how do you work all that out? I mean look you’re speculating a little bit, you’re forecasting property prices, but that’s an easy calculation to make and I’ll show you. But remember, that yield should always be an annual calculation and you can forecast it. The property Price Market is a bit different, but we can kind of look back over historic evidence and see what sort of movements the property Price Market has done. 

So let’s go back to our original example, you’ve bought a property for a hundred thousand pounds. That means you’ve made a 30,000 pounds, cash investment and that cash investment generates you 3,300 pounds per month in profit. I think we’re all agreed on that. Does that all make sense to everybody? Everybody agrees with that? I hope so. 

Now, after two years, let’s just say, you took a two year fixed rate mortgage, just for the sake of this conversation. There are loads of others available, of course, there is, but for this conversation two year fixed fixed rate mortgage. So after two years you’re going to refinance that property and remember you can always refinance or finance up to 75% of the property value and hopefully you see where I’m going here. 

So let’s say property prices have gone up by 10,000 pounds over that two-year. So you bought it for a hundred thousand pounds. It’s increased by ten thousand pounds in value, for that property and that area at that time. But let’s also say that when you first bought it, well if you bought it through me, anyway, the chances are, you would have bought it below market value. 

So let’s just say just to be nice and simple and safe that the property prices have gone up by ten thousand in two years and also you bought the property 10,000 pounds below market value at the beginning. 

So over the course of the two years since you bought it, that’s been a 20,000 pound growth. Would you all agree with that? I think that makes sense. You’ve the prices have gone up by 10 grand and you also bought it 10 grand below market value. That is a growth since the day you bought it. That’s a growth of 20,000 pounds over that two years. 

Awesome right. Now we’re going to refinance the property because now it’s worth a hundred and twenty which means we can get an extra 15 grand out of that property and that goes straight into your profit, it doesn’t matter whether you get the profit now or whether you get a profit over time, it’s still your profit. It’s still return on investment from the initial investment that you made. So we’ve extracted another 15,000 pounds from that property through refinancing in two years. Awesome. 

So, with all of my properties, by the way, I always set a two-year plan. I calculate every single property that I buy, every single that I find, for my clients, for my investor clients. Every single one I calculate on a two-year plan cause I want as much money back as I can within that two-year period. So that I know that I can compound the income, I can compound the profits to reinvest a buy more properties and eventually I’ll be buying 20-30-40 properties per year, which is that’s the way to go. 

Anyway, so look at that, two year plan. Now, we’ve got 30 thousand pounds that you’ve invested in your own cash. You’ve got after that, two year, period, 6600 in profit from the rent, which is 3300 pounds per year. If you remember that part, you’ve also generated 15,000 in refinancing in equity release in equity profit. However you want to say because if you buy it below market value, then you immediately or inequity profit. Would you all agree with that? Hopefully, yes.

So over that two years that property has returned to you 21,000 pound or 21,600 pounds in profit. So now over that two-year period. We have invested 30,000 pounds and it’s generated if you split in two years, two years and we’ve generated about 11 Grand per year in profit. 

So you’ve got your 11% actual yield on the rent which is profit versus your investment is 11% there plus seven and a half thousand pounds a year, which is 15,000, which is. I meant over the two years 15,000 pounds per year. Let’s work it out live. I’ve got my trusty calculator here. Here we go. It’s 21,600 pounds. That’s the amount of profit I’ve made in two years with this one property, but I only invest 30 grand amazing. 

So let’s look at it like this 21600 pounds divided by my 30,000 pounds, 21600 divided by 30,000 pounds equals 72%. Now I’ve got to divide that by 2 because it’s across two years. Remember that divide by 2, that property has made me 36% per year over two years.

Now, would you take that investment if I said to you? Hey, Mr. and Mrs. Investor. Hey, Mr. and Mrs. Landlord I have got a property for you which is going to generate you 36% return on investment per year. Now you would have my hand off for that, right? Yes, I expect so. 

So remember this as well. This is just a quick side note. When you refinance your property after two years, then that mortgage payment is going to change, remember that. So in this instance, for an example, your mortgage payment might go up by 40 pounds per month, but in two years, your rent is probably going to go up as well. 

So a quick tip, always try and keep your rent levels at the same level as your mortgages increase. So again, keep the rent increase at the same level as the mortgage increase. If your mortgage goes up by 40 quid. Try and put the rent up by 40 quid. Don’t be greedy. Definitely don’t be greedy because what you do, if you increase the rent too high you increase the risk of your tenant leaving which means you increase the risk of having an empty property, not good. 

And by the way talking about mortgage payments and so on, if anybody wants me to connect you, with my personal mortgage advisor, then just message me or comment below or send me an email, it’sTom@Pinkstreet.CO.UK I don’t want anything for that. I’ll just connect you with my guy. He’s a buy to let mortgage specialist only does buy-to-let mortgages and also he’s a large portfolio landlord himself. So, you know, really helps him out and his business. It helps you out and your property investing and look, I’ll be absolutely open with everybody. My incentive here is the hope that you will use my lettings team to find your tenants to manage the property for you. 

So if you want to talk about, if you want to get connected with my mortgage advisor, just let me know if you want to talk about finding tenants or managing your property for you. Just let me know and they got oh, by the way, I do offer a DIY landlord service. It’s for self managing landlords that want to look after everything themselves but also stay compliant and legal. 

It’s a very minimal cost service which does just that. Lets you manage everything yourself, no involvement from us except for keeping you compliant and legal anyway, enough sailing. But look that’s why I do this. If you’re going to become a client of mine then brilliant, I’m really happy about that. That’s why I do all this. But if not, they’ll just want to make sure you’re getting this stuff right. There are so many challenges at the moment for landlords and investors current legislation, protocol or tenants rights, and all of that sort of stuff. So we need all the help we can get, right? 

So, yeah. At least you now know, you’ve probably already calculated this yourself, right? You’ve you’ve probably put in all your figures into a spreadsheet or something like that, you should see my spreadsheets. They’re gigantic but now you probably know whether your property is a good return on investment or not. And that will also tell you if you’re looking to buy more property or you’re looking to invest in your first property, then this should tell you what to aim for. 

Now personally, I would not even look at anything below 10% not for myself, not for my clients because that, that for me is a good Target to achieve better than but here’s a quick tip. If you are going to buy more properties, then work out the yield before you go and view the property and that will give you an idea of what you should offer, because that’s always the question. How much do I offer?

Well, work out the yield, that will tell you in order to achieve more than ten percent. I need to offer this amount for this property and if it doesn’t work, don’t buy it. If it if you’re not going to get the offer accepted at the level that makes the right yield for you, don’t buy it, don’t negotiate and negotiate and negotiate. If it doesn’t achieve the yield that you need and the next step as well is work out the yield on your own property because that will tell you whether either you could do better than your current property, might lead you to then sell it and buy a different property. 

There’s a couple of things to consider if you’re going to do that, but I’ll do that. I’ll go through that with you another time another time if you are thinking of doing that by the way, if you’ve got a property now and you want to sell it to buy a better property, then give us a shout. Let me know. I’ll talk you through what you need to consider and so on and if it’s got a tenant in it, by the way, then then you will, you’ve all heard me talk about my landlord to landlord property sales service, which is still not found a better name, it’s so catchy I know. 

Anyway, so it might give you an idea of whether you sell it and reinvest that money, it might give you an idea whether you need to increase the rent or refinance and I don’t just mean refinance to extract Equity. It might be changed mortgages. You might have an expensive mortgages that might be better mortgages out there for you, but again, I will happily connect anybody with my mortgage advisor. If you’re serious about really investing and turning your property into an investment. 

Now remember, I’m going to end here and say that try to remember this that your property, it’s not your baby, it’s not your passion, it’s not your safety, it’s not it’s not about you. The property investment is nothing more than a vehicle which is designed to make profit without you and profit isn’t just about money. Profit is about freedom and giving yourself more freedom, giving yourself more time, more energy, more life. because it’s like, I always say what’s the point in making a load of money from property. If you’ve got no time or energy to enjoy it, or you’re too stressed or you’re worried about getting phone calls from your tenant, at two in the morning because they’ve lock themselves out, or you’re worried because it contractors messed up a job, or you’ve gone round there, and fix something, in your tenants complaining about it. What’s the point in making money from profit? If you’re sacrificing something else to do that?

We should all be anonymous landlords right? See what I did there got that in, got it in but look, go and invest well, stick to your yield, stick to your plan, try and put a two-year plan in place and don’t negotiate your offer, unless it’s profitable. 

My name’s Tom Soane and as always, this is the Anonymous Landlord.