9.23% Gross Yield... But what does an investor REALLY make? 💷
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Gross Yield vs Net Return: A Real Nottingham Investment Explained 🔍
🔸 If you're searching for an investment property, one number tends to jump off the page: YIELD! 6%... 7%... 8%... perhaps even 9%+.
🔸 Gross yield is an extremely useful way of comparing potential property investments.
🔸 But it doesn't tell you how much money you're actually going to keep.
So, using a genuine Cavendish investment currently for sale in Nottingham, let's look at what happens when we go beyond the headline percentage.
🏡 Our REAL investment example
We're currently marketing a tenanted two-bedroom, two-bathroom top-floor apartment at The New Alexandra Court on Woodborough Road, Nottingham.
The numbers are:
🔹 Offers Over £115,000
🔹 Current rent: £885 pcm
🔹 Annual rental income: £10,620
🔹 Headline gross yield at £115,000: approximately 9.23%
🔹 Existing tenant in situ
🔹 Allocated gated parking
🔹 Large private balcony
🔹 No chain
On the face of it, that's a 9.23% gross-yielding investment... But what does that actually mean? 🤔
🧮 STEP 1: Understanding GROSS YIELD
🔸 The calculation is relatively simple:
🔸 Annual Rent ÷ Purchase Price × 100 = Gross Yield
🔸 Using Alexandra Court: £10,620 ÷ £115,000 × 100 = 9.23%
🔸 If you're comparing several properties, gross yield provides a quick indication of how much rental income each property generates relative to its purchase price.
🔸 But there's one rather important word in there: GROSS.
That's the return BEFORE we start considering the costs of owning and operating the investment.
🔍 STEP 2: Look underneath the headline
Alexandra Court is a leasehold apartment and currently has:
🔹 Service charge: approximately £2,500 per annum
🔹 Ground rent: £150 per annum
🔹 So let's take those known property costs away from the rent:
🔹 Annual rent: £10,620
🔹 Less service charge: £2,500
🔹 Less ground rent: £150
🔹 Income remaining: £7,970
🔹 £7,970 ÷ £115,000 × 100 = approximately 6.93%
🔹 Suddenly our 9.23% headline figure looks rather different.
🔹 But here's the important bit: The 9.23% wasn't wrong, it is the GROSS yield.
🔹 And the 6.93% isn't yet the investor's final return either!
💷 STEP 3: What ELSE might an investor need to consider?
🔸 Property investment comes with running costs.
🔸 Depending on the property and how the investment is structured, these could include:
🔸 Letting and management fees
🔸 Repairs and maintenance
🔸 Landlord insurance
🔸 Safety and compliance costs
🔸 Periods without a tenant
🔸 Replacement of items within the property
🔸 Finance costs if you're using a mortgage
🔸 Tax
🔸 HMRC's own statistics illustrate just how significant these costs are across the private rental sector.
🔸 For the 2024/25 tax year, 87.7% of unincorporated landlords declared some form of property expense.
🔸 Repairs and maintenance alone accounted for £6.41 billion of declared expenses, while legal, management and professional fees accounted for £4.16 billion.
🔸 Residential finance costs were even larger at £12.82 billion.
🔸 So looking beyond the headline rent isn't pessimistic - it's simply investing with your eyes open.
🏦 STEP 4: What if you're using a MORTGAGE?
🔹 This is where comparing investors becomes more complicated.
🔹 A cash buyer and a mortgaged buyer purchasing exactly the same property can have very different cash returns.
🔹 Two mortgaged investors could also achieve different returns depending on:
🔹 Deposit size
🔹 Interest rate
🔹 Mortgage product
🔹 Arrangement fees
🔹 Whether borrowing is interest-only or repayment
🔹 How the property is owned
🔹 That's why we wouldn't describe our £7,970 figure above as the final amount an investor will actually make.
🔹 We haven't deducted finance costs.
🔹 We haven't allowed for management, maintenance or potential void periods.
🔹 And we haven't considered tax.
📊 Gross yield is a COMPARISON tool
🔸 This is perhaps the most useful lesson for somebody starting out in property investment.
🔸 Gross yield is valuable.
🔸 It allows you to take properties with completely different prices and rents and make an initial comparison.
🔸 But don't stop there.
🔸 Imagine two properties:
🔸 Property A: 9% gross yield
🔸 Property B: 7% gross yield
🔸 It's tempting to conclude that Property A must be the better investment.
🔸 But what if Property A has substantially higher annual running costs?
🔸 What if Property B has lower costs?
🔸 What if one requires significant maintenance?
🔸 What if their tenant markets, leases, financing options and eventual resale markets are completely different?
🔸 The biggest percentage doesn't automatically answer the investment question.
🏠 So what should an investor investigate?
🔹 Before purchasing an investment property, we'd want to understand far more than its headline yield:
🔹 What is the current or realistically achievable rent?
🔹 What is the service charge?
🔹 Is there ground rent?
🔹 What maintenance should be anticipated?
🔹 What are the management costs?
🔹 What compliance costs will apply?
🔹 Is the property currently tenanted?
🔹 What is the local tenant market?
🔹 How will the purchase be financed?
🔹 What does the investor ultimately want from the investment?
Income matters, but so does cost and risk 🚨
🌸 The Cavendish perspective
Gross yield is often one of the first numbers we'll calculate, it definitely shouldn't be the last ⚠️
Important: The calculations above are illustrative and based on the stated purchase price, current rent and known property costs. They do not represent a forecast or guaranteed return. Cavendish Residential does not provide financial or tax advice. Investors should undertake their own due diligence and obtain appropriate professional advice regarding finance and taxation.
🏡 Looking for a Nottingham investment property?
Whether you're considering your first buy-to-let or adding another property to an existing portfolio, Cavendish Residential can help you understand the property, the rent, the local market and the numbers behind the headline.
If you are looking to invest in property, email Scott Sneath to schedule a call and to run through any off-market opportunities (scott.sneath@cavendishproperty.co.uk) 📧
Source: Cavendish Residential property particulars and HM Revenue & Customs (HMRC) property rental income statistics and landlord guidance.
📸 Scott Sneath, Director of Finance and Operations at Cavendish Residential 📸
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