What is the difference between Yield and ROI (return on investment)?

What is the difference between Yield and ROI (return on investment)?

If you are a new landlord, or thinking about investing in property, you may have seen articles or attended property events which mention both Yield and/or ROI, with sometimes considerably different figures!

In a nutshell, both terms are used for different reasons. Below is a simple explanation of each term and how it is calculated.

What is Yield?

Yield is generally used by agents, to provide an easy property-by-property comparison without taking personal investment and individual costs into account.

In short we divide the purchase price by the annual rent and multiply by 100, to give a percentage. For example: :

• You buy a property for £150,000
• You rent it out at £700 per calendar month
• 700 x 12 = £8,400 (annual rent) divided by £150,000 x 100 = 5.6% gross yield

However, Yield doesn’t take into consideration management fees, void periods, maintenance costs, repairs, bills. In other words, it doesn’t tell you about all the costs involved with owning a property.

What is Return on Investment?

ROI takes into account all of the expected costs involved with investing in the property, so it gives the investor a better picture of the deal for them personally. ROI neatly sums up the ratio between how much you’re putting in versus how much you’re getting out of it. It’s important to keep things simple to understand and to analyse.

Here’s an example of ROI:

• Purchase price: £150,000
• 25% Deposit: £37,500
• Stamp duty & conveyancing fees: £5,000
• Rental income at £700 pcm = £8,400
• Annual Mortgage repayments of £3,375
• based on an example interest only mortgage rate of 3%)
• Est. annual maintenance costs and management fees of £1,680
• £8,400 minus total costs of £5,055 = £3,345 profit
• Divided profit by investment of of £42,500 x 100 = 7.87% ROI

ROI will differ depending on the amount YOU are investing (including refurbishment/redecoration costs), the type of mortgage you choose and estimated maintenance costs. Leasehold properties should also take into account service charges and ground rents.

To help you calculate your own Return on Investment for a property you are considering, use our FREE ROI calculator, which you can use as many times as you like:

Dawn Clarke

[email protected]