Gross yield is the annual rental income generated by an asset, divided by the price of acquiring it – so a property that brings in £10,000 per year in rent and cost you £100,000 to buy gives a gross yield of 10%. (On your calculator, that’s 10,000 divided by 100,000. The result is 0.1, which expressed as a percentage is 10%.) (Location 164)

Tags: grossyield

Note: .grossyield rental income divided by purchase price

Net yield is the annual rental profit (rather than income) generated by an asset, divided by the price of acquiring it. So if the property cost you £100,000, the annual rent is £10,000, and you have costs (including mortgage costs, management fees and maintenance) of £5,000, that’s a net yield of 5%. (Location 173)

Tags: netyield

Note: .netyield net rental profit divided by purchase price. Eg. Subtract mortgage payments andanagement fees

That calculation is Return on investment (ROI) – calculated as the annual rental profit divided by the money you put in. If you buy wholly in cash, the money you put in is the same as the cost of acquiring the asset, so your ROI and net yield will be identical. But if you use a mortgage, your ROI will be higher than your net yield. For example, our hypothetical property cost £100,000 and generates a £5,000 annual profit, giving a net yield of 5%. But say that you only put in £20,000 in cash, with the rest of the purchase price being funded by a mortgage. Your ROI is therefore £5,000 profit divided by £20,000 cash invested, which equals 25%. (Location 184)

the exact same property might give an ROI of 12% if you’re self-managing, 8% if you’re factoring in an agent’s fees, or 5% if you’ve also put in more of your own cash because you want a smaller mortgage. (Location 201)

By the time we’d bought ten properties, we’d invested £250,000 and generated an income of £22,000 per year. If we’d saved up until we could buy properties in cash instead of using mortgages, we’d have only been able to buy two properties – which would give an income of £10,200. On the face of it, using leverage has doubled the returns – but it’s actually better than that. Firstly, buying instantly instead of saving up for extra years has brought in thousands of pounds of extra rental income. Also, if property prices go up by 10%, we’ve got ten properties to gain in value (for a total gain of £80,000) instead of two (a total gain of £16,000). (Location 273)

Tags: leverage, mortgage

Note: .mortgage .leverage

To keep things simple, let’s take the same type of house in the same area of Manchester where we bought for £80,000 as part of the previous strategy. But instead of paying £80,000, we find a house that’s near-identical other than being in pretty poor condition. We manage to negotiate buying that tired and unloved house for £55,000, then spend £10,000 bringing it back up to standard – thereby reinstating its “true” value of £80,000. Effectively we’re creating £15,000 of equity out of thin air, which is our reward for improving its condition. (Location 322)

Note: The margin is the reward foor putting in the time and money to do the house up

when you’ve got less cash to invest, you’ll have to put in more effort and accept more risk to get the same result – and vice versa. (Location 380)

Chapter 3 Lock away a lump sum and watch it grow (Location 405)

Note: h1

With any property you buy, you have two potential sources of “return” on that investment: Profit left over after receiving the rent and paying out your expenses Growth in the property’s value over time (Location 416)

As a rule, growth happens first and fastest in prime and central areas. That’s why I chose in my example to use a modern, relatively new flat in a popular area. The monthly return would have been a lot higher if I’d chosen a house on the fringes (there wouldn’t have been a service charge, and the purchase price would have been lower relative to the rent), but the intention was to maximise capital growth potential. When the economy is in full swing and growth is in the air, demand is always going to be highest (and therefore push up the price more) for the best properties in the best locations. (Location 498)

terraced houses in student areas tend not to be the most desirable, so (in accordance with what we’ve seen in previous examples) they’re unlikely to give much in the way of capital growth. If you consider “total profit” (rental profit plus equity gain) over the entire time that you own the property, it could end up lower than a single let even though the month-to-month income is higher. This becomes even more marked when you divide your total profit by the number of hours you put in over the duration of the investment. Capital growth is never any kind of certainty, but you could end up making less money for more work, even though the ROI appears to be higher. (Location 569)

Note: Student lets may bring more in monthly rental, but are less likely to rise in value

Another downside, when it comes to student HMOs at least, is concentration of risk. What you’ve basically got here are cheap, not-that-great houses that students happen to be willing to pay a good chunk of cash to live in right now. If trends shift (as they’re doing in many student areas towards purpose-built accommodation), you could suddenly be the proud owner of nine unexciting houses where your yield has just been cut in half and your tenants have recurring cameos on Crimewatch. (Location 574)

I said I was going to leave tax aside for these models, but it’s more straightforward to calculate with property trading: if the property was bought within a limited company (generally a good idea for buy-to-sell projects, as we’ll see later), we’ll pay corporation tax (currently 19%) on the profits. That would leave a post-tax profit from this project of £16,200. (Location 645)

The tighter the timescale to reach your goal or the smaller the amount of money you can put in at the start, the more hands-on you’ll need to be, and the less certain you can be of getting your result. For example, if you’re trying to generate immediate cash through trading property (Strategy 5) you’ll have to work hard and there’s a lot more that can go wrong than if you’re just buying and collecting the rent over the years (Strategy 1). Appreciating this and understanding your constraints in these areas is the key to setting realistic goals. (Location 678)