Yield and Return are often confused and so get used in different contexts so just what is the difference?
Imagine that a property investment deal has just caught your attention. Maybe it’s the low price that attracted you, maybe it’s the area the property is sitting in? Or maybe it’s being pitched to you with a “10% yield”?
But then you remember seeing another property the week before and you were informed that you would get a 15% return on investment and that’s why you booked a viewing which you’re going to see later today.
So, which is better? The 10% yield or the 15% return?
The answer, of course, is…. it depends. You may know what yield and return are, but until you relate them to your goals, they’re meaningless. So, first of all, work out your goals so that the numbers mean something to you.
What is the difference between Yield and Return? To understand that we just have to look at how they are worked out. Yield represents the turnover or annual rental income that a property will make compared to the price you paid whilst Return represents the profit you make compared to the money you put into the deal.
Let’s look at an example.
A property is presented to you at the great price of £75,000. It is already tenanted and generates a regular income of £425pcm. This means that the annual income is £5100 or 6.8% of the purchase price. Therefore the yield is 6.8%
Now, let’s say that the same property generates £125 of profit each month and you put in £17,000 (which is made up of a 20% deposit plus £2,000 finder’s fee). This means that you are making £1,500 or 8.8% profit on the money you put into the property.
So, when you’re looking at the numbers on an investment, it’s important to understand whether you want to look at Yield or Return.
Yield basically tells you how long it will take to generate enough money to match the purchase price; in our example above that would be 14.7 years. Return tells you how long it will take before you get back the money you (or your partner) put in. In the example above that would be 11.3 years.
As investors, the question is normally, “How long before I get my money back?” and so I would suggest that the majority of investors are going to base their decisions on Return.
Let’s see how that affects the scenario presented above.
If you have decided to always get a 10% yield then you would have to weigh up whether you want to lower the purchase price (to £51,000) or increase the rent (to £625). Both scenarios seem unlikely, but maybe you could find a way to make them happen?
On the other hand if you want 10% return, then you need to generate £141.67 of profit each month. Just an extra £16.67 each month.
And that seems a little easier to achieve doesn’t it?
Still not sure about those numbers? Maybe the video will help?
(HINT: you can view the video and subscribe to my YouTube channel at https://youtu.be/2MJ9tO8ghSY )
I am not a financial advisor and nothing in this article is designed to be nor should be construed to be financial advice.