If you walk into pretty much any estate agency
across the country, make it clear that you’re a property investor, and ask to see their
finest investment property deals, I can pretty much guarantee you they’ll put some properties
in front of you and start to quote you a percentage return that they feel that that property will
actually give you. This is called yield. Let me tell what it
is and why it is completely the wrong set of numbers for you to be focusing on. Hi there.
My name is Tony Law from Your First Four Houses. My channel’s all about helping you get to
invest with property number four as quickly and as painlessly as possible. As I said, you’re in your local estate agent.
They start to put some properties in front of you. They’re thinking well you’re a property
investor. You’re going to want to know what the yield is. Let’s start things off by looking
at that actual equation. Yield is the annual rent usually based on just a single family
unit renting the property, divided by the purchase price, multiplied by 100. It’s that, the yield, that the estate agent’s
actually going to be quoting you. Let’s just pause for a minute and have a quick look at
this equation. The annual rent generally speaking it’s going to be based on a single family
unit renting the property, and in truth, there’s not a huge amount that you can do to actually
vary that amount of income that’s coming in. There are a few things that you could do,
but not a huge amount of vary with that particular number. Let’s look below the line at the purchase
price. Well, the purchase price is the purchase price. That’s what you’re buying it for. Again,
there’s not really anything you can do to actually change that. Consequently, if you
get four terraced houses for example in a row. Let’s imagine we’ve got three bedroom
houses, two reception rooms. If you look at the yield that you’ve going to get on those,
they’re all generally going to be about the same. In the example I’ve given you here, they’re
5%. Now property investors, people that are doing this professionally, use a while different
set of calculations. They use return on investment. Let’s look at what that equation looks like.
We’re going to take the annual profit. We’re going to divide that by the cash that we’ve
invested in the deal. We multiply that by 100, and again that gives us our return on
the investment. Again, let’s just pause for minutes and let’s
just have a little look above and below the line. Let’s start off with the annual profit.
Well, what does that look like or what is it made up of? It’s made up of the annual
rent that’s actually coming in, take away the annual costs that are going out. The annual
rent that’s coming in, is there actually anything specific that we can do to actually vary that? Well the answer is absolutely yes there is.
You might choose to multilet the property. You might use an LHA strategy. You might split
the property up in some way to increase and boost the income. You might change it from
commercial to residential or vice versa. There’s a whole bunch of different things that you
could do to change the level of income that’s coming in. The costs going out. Is there anything that we can do to change
that? Absolutely yes there is. You might have a mortgage with a sizable deposit, meaning
that your monthly costs going out mortgage-wise are less. You might have a very small deposit
with a larger mortgage going out. You might have a number of different bills that you’ve
got to factor into this. Frankly the costs going out can vary enormously depending on
what you’re actually doing with the property. Let’s look below the line now. Let’s look
at the cash that we’re investing in the deal. That’s actually going to include the initial
cash that you’re going to invest plus any refurbishment costs that you’re actually going
to put into the property. The initial cash that you’re going to invest in this particular
property, can that vary? Absolutely it can. You might decide to put 100% of your own funds
into buying this particular property. You might actually use an investor’s money to
fund this particular project and in theory have none of your own money in the actual
deal. Obviously that’s going to change a number of other parts to the equation, but it’s a
fact. That can vary dramatically. Maybe it’s somewhere in between. You might have a high
mortgage, a low mortgage. That is absolutely going to change. Your refurbishment costs. Can they change?
Of course they can. Depending on what you’re going to actually do with the property, they
can vary wildly. Especially if you’re going to change the class use for example. All four
parts to this can dramatically change depending on what you’re actually doing with the place. If we take those same four properties, it’s
absolutely the case that you can get a 5% return. You could get a 50% return on the
house next door. You might get zero on the one after that. If you’ve got none of your
own funds in the property deal at all, it’s absolutely possible that you could get an
infinite return on your money. If I look at some of the properties that I’ve
got in the right-hand column under return on investment, it absolutely says infinite
as a return on my investment. The next time you are looking at a number of different projects
and you’re trying to decide which one to go for, please ignore yield if you can. Take
the extra effort that it’s actually going to take to calculate a genuine return on your
investment and then please base your decisions or at least make one of the components to
your decision the return on the investment. I really hope that you found that helpful.
I really do. This return on investment calculation is something that is so dear to my heart and
I genuinely think that a lot of property investors don’t use this when they’re trying to decide
what to buy. If you found that helpful, I would love it if you could take a moment to