UK Landlord Forum / Life

I've never used Yield (Gross Yield certainly) as any kind of decision-making tool for my Landlording activities. I've been thinking about how it is a very blunt and inaccurate tool (from my perspective anyway) that plenty of people (and Homes Under The Screwdriver) seem to use an indicator of how goes a prospective investment is, and even worse, how good an actual investment is doing... I've definitely heard people crow about how high their Gross Yield is.

I thought about a simplistic example... let's say you have a property portfolio worth £1,000,000... it doesn't matter how that's composed, it could be 2 swish properties or 10 modest ones. And let's say you're receiving a monthly rent from your portfolio of £5,000... again, no matter how - could be 10 x £500 rent or any other combination - your Gross Yield there is 6%.

However, if your property value increases, which is a very desirable thing, by say 10%, to £1,100,000 then your yield will decrease if the rents remain the same - which they are quite likely to do (because it seems rents, although many out there will say they keep on rising, are much more likely to remain the same for the length of a tenancy)... and, likewise, you can't just increase the rent when you want, willy-nilly, but the market price of property will change month-to-month and quarter-to-quarter - you can change your rent in-line with that kind of frequency.

But if you're the kind of Landlord that pays attention to your Gross Yield, then you can easily start to feel as though you are doing worse than you were before - even though you are actually doing better because the value of your assets has increased by 10% and your income has remained exactly the same.

At £1,100,000 and £5,000 per month rent your Gross Yield will have dropped to 5.45%... that's a reduction in your yield of 9%. You can sob into your cornflakes at that news - you're now a failure!

To get back on an even keel you'd need to increase your rental income by £500 per month.

Does anyone make good use of Yield in their decision-making process at a portfolio level? Maybe to compare and contrast the performance of properties at something you may consider better than a subjective level?

Using yields is fine as a blunt instrument, as you say but there is plenty of misunderstanding out there about what rental yields really tell us when looking for property as a suitable investment - there is a lot more to consider, of course. Choosing a property for a perceived high yield alone can have its consequences. Plenty of property investors have found that high yielding properties can come with the added cost of puny capital growth, shocking cashflow or lots more risk.

Those investors who choose to buy property based on yield alone just to find that the area they selected stayed absolutely stagnant for donkeys years, with zero cap growth to boot. Without that capital growth, their ability to grow their portfolio died with the area they bought in. So making those buying decisions with drivers of capital growth at the forefront of your mind along with yield becomes critical for any aspirations of growth.

Then you have those who decide to buy allegedly 'dirt cheap' properties based on affordability and the grand promises from a local agent that it would be positively geared in absolutely no time at all... Then their costs of holding sky rocket and chomp great big chunks out of their anticipated cashflow.  So assessing a purchase for its cashflow as well as yield expectations becomes top priority.

So gross rental yield is never going to be a reliable way of assessing whether or not a property will present you with a delightful cash flow, enjoy capital growth down the track or will be a nightmarishly risky investment option. Getting a real handle on cashflows, taking into account the rent and anticipated costs can give a far more reliable indication of whether a property is viable or not.  ROI is the preferred litmus test for most savvy property investors. An ROI assessment gives you the ability to compare one deal against another without relying on the blunt instrument of gross yield but obviously shouldn't be the ONLY factor - but I believe it should be your go to calculation when choosing an investment. Relying on attractive gross yields often quoted by developers and agents would be a dangerous way to buy in my view - sure plenty of people have been caught off guard over the years.

You seem, to me, to be eminently sensible.

Let's not overdo it!