7 steps to finding great investment property Step 4: Potential Yield
In the last post we used Rightmove and Google maps to identify potential areas with available rental properties in an area that we narrowed down from previous research. The research highlighted potential problems of over supply in our initial area so we moved on to a second postcode area that we had identified previously. In this post we will continue to look at the second area which appeared to be a suitable rental area. This time we will look at potential yield. Yield percentage is what provides an investor with a suitable profit each month. The yield comes from rental income, not from capital growth. Capital growth is a separate indicator.
As before, I will continue to use the Rightmove property portal and Zoopla. In this part of the research I am hoping to find that the area highlighted in the last post has properties that provide a decent rental yield.
The first thing to consider is the number of properties for rent and the average rent price being asked. Like before, you will need to put in the postcode of the area that you have decided. You also need to use the filters that you have determined from previous research. In this case it was 2 bedroom houses that seemed to be the most affordable to buy. In other areas it might be flats or properties with fewer or more bedrooms. This will be down to you and your budget.
In the previous search which was undertaken a few weeks ago now, there were around 17 properties fitting the above criteria that were available for rent and the rental market appeared to be active enough to invest. When looking at an area it is important to see whether properties are moving and being let. The properties found in the last search were recently added to the property portals which was a good sign. I then moved on to another postcode that we had searched last week with regards to property prices. This area had far fewer properties to rent. I filtered it down to 2 bedroom houses in Zoopla and looked in map view.
The next thing was to look at rental prices and these averaged out at around £500-550 per calendar month.
The search results for the postcode and property type this week show 9 properties for rent on Rightmove and 20 on Zoopla. The prices start at £450 and go up to £850.
The top and bottom prices appear to be outliers and as there were 11 properties with a rental asking price of £525 per month and around 5 at £500 I will use £510 as the average. If you were calculating this yourself you could use a real average or make a decision on the rent you would ask yourself – based on the results.
In order to calculate yield you need to look at the property price in the area and decide on the price you can afford or are willing to pay. We had already seen that properties were affordable in the chosen area but now need an average so that potential yield can be calculated.
In this area the prices ranged from £50,000 to £100,000 and I will use an average of £75,000 to calculate potential yield.
These are estimates but it does give you enough information to enable you to decide whether the area is going to provide a profit.
To work out gross yield you divide the annual rent by the property price and multiply it by 100.
Annual rental income x 100
£6,120. x 100 = 8.16%
Gross yield is what you hear about when watching Homes under the Hammer – they do add renovation costs to the property price before calculating and you would need to do the same if you buy a property that needs renovating prior to rent. In the case above the gross yield is just over 8% which is good.
This calculates the profit in real terms before tax and takes into account all costs.
Annual rental income x 100
£75,000 Purchase price
£1,680 Mortgage interest costs £5,100 x 100 = 6.41%
£1,000. Running expenses. £79,581.28
£1,020 Void periods
£881.28 Management Fees
£79,581.28 Total costs
Even taking into account all of the annual costs of a property and including 2 months void period, the net yield is almost 6.5% which is very respectable.
This research reiterates that so far, this is a good area for investment but it is not quite enough information yet. There are still some other things to consider. In the next post we will look at these.
Next Post Step 5
Return on Investment, more analysis
These posts are meant to provide information relating to how to research an area in order to help investors who are searching for properties. Examples given are not recommendations to buy and investors need to do their own due diligence before purchasing investment property. Hopefully the information provided in this 7 step approach will make your search a little clearer.
Books By Author Dawn Brookes
For further information about property investment please take a look at the following books and if you do purchase any of them – please leave an honest review. Don’t by the tax booklet if you buy one of the main books as the information is included in these.