1st August, 2013 BACK TO ALL PODCASTS

This week we’re going back to basics and explaining some essential property calculations: gross yield, net yield, and Return on Investment.

We explained what each meant, gave an example, and talked about when you might want to use it – as well as sounding a note of caution not to get too caught up in the numbers and forget about all the other factors that determine whether a property investment will be any good.

Resource of the week

Rob B wasted a good portion of his week creating a fantasy life in different parts of the country, thanks to the BBC’s “Where can I afford to live?” calculator.

By filling in the property type you want, and the amount you can afford to pay in rent or mortgage repayments, the site calculates which areas of the country you could afford to live in – and what percentage of the country as a whole you could afford.

It’s broad data, but could be useful in targeting areas of the country you hadn’t previously considered for investment. Or distracting you from your emails for an hour, at least.

This week’s news

In The Telegraph this week, Kirstie Allsopp said that getting on the property ladder has never been easy.

Which was our cue to go into a bit of a “young people these days don’t know they’re born” rant. Sorry, young people.

Mentions this week

We mentioned that to celebrate both Robs being in London for once, we’re thinking about having an informal listeners’ meetup. If you can get to London easily and you’re interested in chatting property one evening, drop us a line and let us know!

We also mentioned that our Entrepreneur on Fire interviews are now up, and gave another shout-out to Mark Alexander from Property 118 in response to his iTunes review.

Tell us what you thought of the show!

Did our explanations of different property calculations make sense?

Which number do you primarily base your investment decisions on?

Just let us know by leaving a comment below!

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Full transcript

Rob Bence:                         It’s time for the Property podcast where every week tens of thousands of property investors new and experienced join together to get new knowledge and laughs at our expense with me, Rob Bence.

Rob Dix:                               And me Rob Dix. Join us every Thursday morning for your weekly dose of property ideas and motivation. Head over to our website at the propertypodcast.com to keep the conversation going. Now let’s get started.

Rob B:                                   Well, welcome to the Property podcast. This is episode 20 with a brand new funky intro. It’s Yields Explained this week, but Rob what a ferocious start to the episode

Rob D:                                   Happy now, everyone? Now you’ve destroyed Ric.  Are you happy?

Rob B:                                   Ric’s homeless but you’ve got a new intro.

Rob D:                                   I like it. I really like that. It was a change worth making. I hope everyone enjoyed that.

This week, we are going to be explaining the 3 most important calculations in property investment. So, we’re going to give you some simple examples to show exactly what they are and when they might come in useful. And if you stick around, we got a fascinating resource of the week this week which we got some really interesting data about prices and rents across the UK

Rob B:                                   But before we get going, we always send some [0:01:14] to the people who have taken the time to leave us a five-star review. So, thank you very much to the following.

Charles, “It’s a great podcast. I’m 22 years old. I’m a 2nd year studying real estate in university. I want to start by saying a big thank you to Rob and Rob for inspiring me and reminding me on why I chose to do this degree. It’s so easy to get bogged down from university course with the nitty-gritty boring stuff. This podcast really helps me to see the bigger picture of property investment and the possibilities available. I’m so glad to have found this podcast. Thank you very much.” Well Charles, thank you. I hope the degree is going well. If we can help with anything, please get in touch.

IamLandlord, we know who this is Rob. We’ve done an episode recently with Mark Alexander. This is IamLandlord.

Rob D:                                   Oh, that’s who it is. I didn’t realize

Rob B:                                   He says, “Thanks for your mention on problem solving property podcast episode. I had not previously downloaded any podcast. I can only say this is the best I’ve listened to so far. Seriously though, I can see why you’re having so much success. Very interesting and professionally presented. Just a bit of constructive feedback. I’ve played it to a few friends at the beginning, and they said they didn’t realize it was a British podcast because of the American guy. [0:02:21] a few people in the UK.” Well Mark, as you now can hear we’ve solved that problem. He says, “It’s great to have work with us on Property 118. I hope it increases the subscriptions. All in all, I have fantastic podcasts thanks to five-star review.” Thank you very much, Mark.

For those who haven’t listened to that episode, go back and listen to it. It’s put together by Mark Alexander from Property 118. Really good episode on how to solve any property problems. We link to that in the show notes. Thank you, Mark.

Rob D:                                   Thank you very much. And thank you to Charles as well. I didn’t even realize he could do a degree in real estate. I wish I had done.

What have you been up to this week, Rob? Well, a matter of fact I know what you’ve been up to.  You’ve been doing the same as me in terms of recording yet another podcast

Rob B:                                   This is the podcast that we recorded with John Lee Dumas from Entrepreneur on Fire. Entrepreneur on Fire is one of the biggest podcasts in the world. At the moment, he saying quarter of a million but he’s told me before the interview that he’s had 300,000 downloads every month which is just incredible. That is a lot of people. We’ve both been lucky enough to have interviews each on that podcast which is fantastic. My episode goes out on the 29th of July. So, when you listen to this, it’s already out. So, we’ll link to it on the show notes. The 29th of July was my interview. Go and listen to that. It gives you an insight and some of my views on business. If you’re interested in business, go ahead and listen to that episode. Rob, when’s your interview out? How did it go?

Rob D:                                   Mine I did with my wife. It was a joint interview. It was really good fun. I think that’s coming out on the 1st of August. Today in fact. That should be up by the time you listen to this episode. So, you can check that one out as well. Get a bit more of an insight into the non-property parts of my life because we touched on property. I presume you exhausted John when you were talking to him about that. With me, it was more about other things. But it was really interesting

Rob B:                                   First of all, John, it was so nice to talk to you. You’re such a positive happy guy and it comes across that way in the podcast. It’s so nice when you get to talk to him off air, the persona continues. He’s such a great guy. It was nice for me because yes, the property was related but it was more business-centric generally because it is called Entrepreneur on Fire. I wanted to give as much value as I could the business point of view. I don’t know if you would have done similar, Rob. If anybody’s interested in business and property, then go ahead and listen to our interviews and let us know what you thought of it. What else have you been up to this week, Rob?

Rob D:                                   Well. I’ve been preparing to leave Berlin. I’m heading back to the UK. I’m going to be around for at least a month maybe a bit longer. I’m going to be doing a bit of a UK tour. Property things are taking me to Liverpool, Manchester, possibly Leeds. If you’re listening and you’re in any of those places and you want to get together for coffee, then drop me a line. You can get in touch via propertygeek.net. I’m always up for meeting listeners. Also, we were talking, we realized since we’re both going to be in London, it might be interesting to do a little informal listen and meet up in London as well. If you’re in London or you can get in London easily and you’re interested in just getting together with us one evening, go to the propertypodcast.com. There’s a contact page there. You can send us a little message drop us a line. If enough people seem to be available and interested, then we’ll have a little get-together. We’ll not be doing a live recording of the podcast, but we can just have a little chat about property and everything else and it can be really good fun.

Rob B:                                   That would be really nice. So, if you are interested and if you’re in the London area or you can get in London easily, then just get in touch. Let us know if you’re up for that. If there are enough people says, “Yes, we’d like that.” Then we’d be more than happy to set up a meet-up. I think it would be really good fun. Do let us know. Get to the website. Go on the contact form. Just say, “Hey guys. I’m in London. I think it would be good to meet up. Let me know when you’re about.” and we’ll sort something out.

Rob D:                                   I’m really looking forward to that. It would be good to be back in the UK and to put some faces in names. Moving on, new story this week, we’re damning young people

Rob B:                                   Yes, after helping all young people with first time buyer’s episode, now we’re going aggressive. No, we’re not really. It’s just that really interest in article Kirstie Allsopp from Location, Location, Location. The beautiful Kirstie. I do think she’s fabulous. She wrote an article in a blog for The Telegraph, and she’s basically put that it’s never been easy to get on the property ladder and modern media seem to be pushing the agenda that it’s not fair that first time buyers can’t get on the property ladder. Actually, other than 3 or 4 years being sort of 03-07 when the lending went a bit crazy. Other than then, it’s always been difficult. You always had a safety deposit and you’ve always had to work to earn your own property ladder. Property investments is not a right; it’s a privilege. Owning your own property to live is not a right; it’s a privilege. I’m not trying to get all preachy but I think it was well said. She took a stand anyway. We both agree with it. We’re all for everybody get on the property ladder but it shouldn’t be given to you. You have to earn it like everybody else. Really good that she’s took her point of view on that. I thought it was really interesting. I know these new schemes are coming out in January which will make it a lot easier but still you get 5% deposit together. I just thought it was an interesting article Rob and we’ll link to it on the show notes

Rob D:                                   I completely agree. I thought it was just me being a grumpy old man and [0:07:13]  But now I think it’s exactly right. We see all these new stories like ‘It’s so hard now. I need to save up so much for a deposit’. Well, of course you do. That’s kind of how it works. I don’t see what’s unreasonable about that. You need to earn it. As a lender, I can see why you wouldn’t want to give someone all the money they need to buy a house. It just seems entirely normal. I don’t think it’s a bad thing at all. I think it’s good for people to have the mindset. When you’re new, when you’re just leaving school, you need to earn it because you get used to having to save up. And once you’ve saved up for your first property and realized it’s not that hard, then you can save up for your 2nd and your 3rd and so on.

If you listen to The Property Podcast, then you have a portfolio before you know it

Rob B:                                   That’s right. It just seems difficult when you haven’t invested in a property and you’re saving a deposit and you’re looking for your first home. You do have a snowball effect. The more you build up your portfolio, then it becomes easier to increase the size of it because you’ll find that one of the property has gone up in value by x amount so you can draw equity from that property. It goes snowball. So yes it may seem daunting in the beginning but it does get easier. I promise you. It makes it so much worthwhile as well if you’ve earned it

Rob D:                                   And we’ll move on to the topic of the week. This week, we’re talking about yields. We’re explaining yields. If you are getting started in property or you’re interested in buying somewhere for the first time, you’re going to need to know what these calculations mean. If you’re an established investor, you still might not be too clear on what some of them mean because these are terms that get thrown around quite a lot.

You always hear about yield, but it’s not helpful really just to say yield because there are two different types of yield. A lot of the time people don’t make clear which one they’re actually talking about. Sometimes that’s just because they have an assumption of what they mean and they seem everyone else is talking about the same thing. But there are some situations where you might be misled by being led to believe that a certain type of yield is being talked about when actually it’s the other.

What we’re going to do is break down the 2 different types of yield which is gross and net, and we’re also going to talk about return on investment which is another important calculation. We’re going to give you an example for each one and explain why it’s useful and the circumstances in which you might want to use in this calculation. There’ll be no need to have a calculator ready. It’s a lot more simple than I might have just made it sound

Rob, besides that, how about you give us an example of gross yield, what that means?

Rob B:                                   Gross yield is probably the yield that you’ll see the most. So, on [0:09:30] or on the internet you’ll often see gross yields quoted. A gross yield is really simple. Let’s say a property purchase price is £100,000. You’ll buy a property and it’s £100,000 and the total rent you receive each year is 10,000. So you buy it for a 100,000 and all the rent comes in and that’s 10,000. That’s 10%. So, your gross yield would be 10%. Really simple. If it was 80,000 the property price and you got 8,000 rent, then that would be 10% gross yield. It’s really simple. It’s simple to use. It’s simple to understand, but is it useful?

Rob D:                                   No, it’s not. It depends because there’s an investor I know, for example who knows his area extremely well and he knows that the cost of all different properties are all roughly the same. So, he uses gross yield as a really quick and easy way of seeing if something meets his criteria or not. However, I would say that for most investors, you’re leaving too much information out of this calculation because you know what the rent is but you don’t keep all of the rent as we’ll come to in a minute. The calculation is very simple but it leaves out far too much to be of much use for any practical purpose

Rob B:                                   I just don’t use them. When I taught my investors, gross yield isn’t in the conversation. I know a lot of companies, marketing companies whether they’re property investment companies or they’re developers talk about gross yield because it looks good. That’s all it is. It can make investments look good. As Rob said, it just leaves so much out of the table. So much isn’t considered. As far as an investment decision point of view you’re using to make a decision, you shouldn’t be using it. It’s good to understand it. That’s why we’ve covered it. It’s good to acknowledge that most people use it so you can see that for yourself. But in terms of a tool to help you make an investment decision, don’t bother. There are far more effective tools and yields you can use which we’re about to go into. Rob, net yield. Do you want to cover what it is and an example?

Rob D:                                   Let’s do an example. The property that Rob was talking about a minute ago that you might buy for 100,000, it might generate a rental income of £10,000, but you’re not going to get to take home all of those £10,000 because there will be costs associated with it. There’s going to be costs such as insurance. There’s going to be your mortgage payments. There could be agent’s fees. There’s going to be all kinds of things that you got to pay out before you can keep what’s left over. So, to calculate the net yield, you take the amount that’s left over after you’ve deducted all your costs and you divide that by the purchase price. Let’s say the 10,000 gross rent that was generated, by the time you’ve paid out all those costs, you’re down to 5,000. That’s 5,000 you actually get to keep at the end of the year. You take that 5,000; divide that by the purchase price that’s 100,000, that gives you 5% net yield. Pretty simple again. It’s the same calculation but you’ve just deducted some things first to make it a bit more realistic. Rob, is that useful?

Rob B:                                   Yes, it’s definitely one to use because it gives you a better indication of what’s going on. Let’s look at the 2 examples over. The gross yield—let’s say it’s the same property. The gross yield is 10%. That might sound really attractive especially if you’re not familiar with yields and you think ‘Well, I got 2% in the bank and that 10% is fantastic. That’s much better. That’s 500% more.” But the net yield shows you a truer picture because it says, “Actually, that same property, after my cost, I’m only going to get half that.” So, the marketing brochures were plastering 10% gross yield where actually, I’m only going to see 5 % in real terms. That’s far more important. You’re only kidding yourself if you use the gross yield. “I want to know what the net yield is. I want to know what I’m getting at the end of each year. What’s my return?” It’s far more useful. It’s a better tool to use. It brings in more of the information. It’s just far more effective and it’s one-off the way I assess an investment with foreign investors

Rob D:                                   You can see an example of why it’s so useful if you think about buying a house for 100,000 versus a flat for 100,000. Say they brought in the same amount of rent, but the flat might have a service charge of £1,000 a year whereas the house doesn’t have one. Even if all other costs were the same, that service charge has reduced your net income. Even though you’re looking at the same gross yield, the net yield is different. You wouldn’t know that if you only look at the top line figure. By considering the net yield, it gives you far more realistic basis on which to make a decision.

However, there is a third calculation you can use. You might be thinking “5% doesn’t sound all that exciting.” It’s like if you can maybe get 3-3 ½, 4 % by keeping your money locked up in the bank long term, then you’re not getting that much extra. However, you’re not going to be putting all your own money in most of the time. That’s when return of investment comes in useful

Rob B:                                   Return on investment or sometimes referred to as ROI or cash-on-cash return. You may hear a whole lot of different things but return on investment is what most people would call it.

What is it? Return on investment is the tool, the calculation that I use the most because not only does it help you assess one property from another, but it also helps you assess it across different asset classes.

Let me explain.  Let me give you an example first. Let’s say the £100,000 property we talked about before, it’s cost us £35,000 to purchase. That’s not just your deposit. The deposit may be 30,000. You may have got 70% mortgage and you’ve got £30,000 deposit and you got 5,000 in other costs assuming you include all your purchase costs. That might be solicitor’s fees, broker’s fees. There may have been all the fees involved. I’ve just rounded the numbers here to make it simple. I’m trying to make it as realistic as possible. Let’s say all your total costs to get this property and get it in a [0:15:25] condition is £35,000. The income is the same at 5%. So it’s cost us 35,000 of our own money to get this property and we got 5,000 net income coming in. But what we do is we look at 5,000 versus the 35 we’ve put into the investment. Because we only put 35,000 of our own money in, we look at that as a percentage term. So, we got okay, 5,000 of 35,000 is 14.3%. That means we got a 14.3 % ROI.

There’s a couple of things to point out here that you must do. It’s not just the deposit when you look at your purchase costs.  It’s all your costs, and it’s not just your gross income; it’s your net income. If you’ve got letting agent’s fees or services charges, you take them off and you get down to that net number and it’s the same as the purchase cost. Don’t try to make the ROI, return of investment, look better than it is by conveniently dropping things off to make yourself feel good about the investment. Be as honest as possible. Is it useful? Rob, do you use it?

Rob D:                                   Yeah, that’s the number I use most as well because I think of it in terms of how long will it take for me to get my money back.  If I was getting a 20% return on investment, that makes me think, “Well, in 5 years I’ll have all that money back that I put in and I’ll be able to use it to buy something else.” That’s just one way of looking at it, but I like to think of it that way.

It’s the number that’s the most realistic because the gross yield is extremely simplistic, net yield is a bit more realistic. The return on investment is dependent on how you’re financing the property, how much of your own money you’re putting in. For that reason, if you do what you said and actually rather than trying to cook it to make it look better, you are completely realistic and conservative and you got all the right contingencies in place, then you can look at it and go ‘Yup, that is the return I’m getting out of it. That’s the number that I compare to what I get in the bank or when I put it in the stock market or anything else.’

It’s the most directly useful number and it’s the one I use all the time. It’s a bit harder to calculate because you have to think about all your costs and think about how you’re financing it. But it’s worth doing because it’s the number that really tells you what you’re doing here, what your reward is going to be for the effort and the risk that you’re taking

Rob B:                                   And I use it for all the cash flows that I give to our clients at RMP. If we look at the cash flow and we go for it, the very bottom of that is the ROI. That’s the most important number—the number at the top what you’re heading for and the number at the bottom what you’re getting out. There are all the numbers in the middle. Some people get hung up on all the different things, “Well, I don’t want to pay this or I don’t want that or can I reduce that cashbook.”

Actually, we got that for now. Look at the bottom number. Is that a big enough number for you? Does that satisfy you? Yes? No? If it’s yes, then it doesn’t really matter what’s in the middle. That’s just working it down to the bottom number. If no, then you can go back up and look at it and say, “What am I happy or not happy with?” But the most important number in any cash flow that you do is that bottom number which for me is the ROI, my return on investment.

Rob D:                                   So, just to wrap this up, you could say that each has a purpose. Gross yield is something to be very careful about. Net yield and ROI are far more useful really. Of course, the numbers are really important but there is more to investment than the numbers like if you can find somewhere a property that is dirt cheap because it’s so cheap to acquire, it means your yield or your return on investment in theory is catastrophically high. But if you got other problems like no one wants to live there and it’s empty all the time, then you’re not actually going to achieve that number at all. So, you’d want to take these numbers and also look at the reality and all other factors involved and look at the two and see if it hits the mark on all of those because you can’t pay your bills with yields. You need to look at the actual pounds and pence you’re going to have left at the end of it

Rob B:                                   That’s yields. If you have any questions, get in touch. You can either comment on the website or you can contact us directly thru the website. Whatever is easiest for you, please do.  We’re on Twitter as well. If you have any questions, you’d like to get into this in more detail, we’re more than happy to.

But we’re going to move on to the resource of the week. It’s the good old B Rob, the BBC quite a useful funky tool

Rob D:                                   Good, isn’t it? I’m just having a little play around with it. Things you dug up, maybe you can explain it briefly while I have a little bit more of a play

Rob B:                                   You see where you can move to, Rob if you come back to the UK

What is this tool? We’ll link to it in the show notes. It’s titled “Where can I [0:19:46]” What you do is there’s a few boxes on the top left of the web page and you go and say do you want to buy or rent.  So you click on buy and you say deposit amount.  Say, you’ve got £50,000.  So, you might enter that in. Then you say how many bedrooms you want. Let’s say you want a 3-bedroom property and then finally it says, “Do you want some of the cheap rents of the market, mid-priced area of the market or the most expensive part of the market?”  Which basically means the rougher part of town, the normal part of town or the best part of town.

Say you just want the normal part of town, the middle range; you click how much you want to spend on monthly mortgage payments. Let’s say £900, then it gives you a map and it shows you exactly where you can or cannot buy. So, based on that criteria you want to buy, you got £50,000 deposit, you want 3 bedrooms you want to live in the average area of town, you’re prepared to spend 900 a month on mortgage payments.  Then you can live in 73% of the UK. And it shows you exactly where that is. So, most of the north gets blued where you can see where you can live. You can probably understand that southeast shows you that you can’t. There are exceptions, but it’s really interesting.

It was actually covered in the news. I went in and had a little play around with it and had a bit of dream building. “Oh, I’d like to live there. I can’t buy it for that much though.” It’s just good fun. You can have a look at it, go use it. We’ll link to it in the show notes. It’s a good fun tool. Also, you can use it for rent as well. So, if you want to see what an area is renting for and what the average is in that area, then it’s pretty useful as well. The rent one is probably more useful for property investors because it gives you can idea of what local market is doing

Rob D:                                   It’s obviously going to be a really broad data and it’s not something that you want to kind of base  on solely, but it is really interesting to see because like you say, broadly as you move the slider along, it’s always the southeast and London that you can’t afford to live in. But there are other little pockets that are cheaper that you might not have realized. It’s definitely instructional to take a look at the big picture and just, “Oh, Lincolnshire.  That’s cheaper and quite fancy that.” You can easily turn it into an hour of putting there and building a fantasy life for yourself

Rob B:                                   If you want to procrastinate like I did for now and when I found it, then this is a great tool

Rob D:                                   We’re going to link that up so you too can waste a good portion of your week like we did. That’s it for another week then, Rob

Rob B:                                   Yeah, it’s been good. It’s been fun. I hope you found it useful. If you have any comments especially on the new intro, our new and funky intro, then leave us a comment. Let us know what you’re thinking but while you’re on the website and you can see it’s been improved and tarted up recently, please leave us a review. There’s a big button on the home page on the right. Just hit ‘Push review’. Leave a 5-star review and it will make a big difference. We promise to read out and thank you ourselves if you do go thru the trouble. We’d really appreciate it. It’s on the homepage of the website where it says ‘Leave a review’. Just click on that and it will follow thru to that page in question.

Next week, Rob, we got five property investments you should avoid

Rob D:                                   We normally spend a lot of time saying ‘The type of investment you want should—it depends on your goals, it depends on where you want to end up blah-blah-blah, but we’re actually going to take a position on this one. We’re going to say there are five types of investment that whatever you’re trying to achieve, you should absolutely stay away from. We’re going to be revealing what they are next week.

Rob B:                                   I think we’ve been motivated by Kirstie Allsop and her – she’s taken a position on something, “We can do that too.”

Rob D:                                   Absolutely

Rob B:                                   Next week, we’re going to take a stand. We’re going to throw our opinions out there. We might peel a few people off but we’re going to tell you our honest feedback. We’re going to tell you what you should avoid. Listen up for that one. It should be a good episode.

Rob D:                                   Thank you very much for listening. Do go and leave your review. While you’re over at the website propertypodcast.com, you can sign up for the mailing list. We’ll see you again next week

Rob B:                                   See you next week. Enjoy our funky outro. Bye everyone

Rob D:                                   Thanks for listening to the Property Podcast, make sure you join our mailing list at the propertypodcast.com.

Rob B:                                   And remember, we love 5-star reviews. Rob even loves them more than air miles.