Investment and the Gross to Net Yield
October 27, 2010
It is a hot topic with all property investors, the ‘leakage’ as it is often called from Gross to Net Yield.
One of the first sums investors work out is what is the gross yield of an investment.
Simply, this is calculating the expected rental for
the year divided by the purchase price.
In today’s market we are told from various research that this averages around 4.5% to 5%.
The next sum many will do relates to how the rental income
covers the financing costs.
However, you also need to look at the costs of running the property, this can include maintenance of the property (service charge, ground rent in the case of leasehold properties), agency fees, insurance premiums, and incidental costs. If you talk to institutions such as pension funds about investing in residential property you often hear a deep intake of breath and a muttering about gross to net leakage being the problem.
These costs on the whole are unavoidable. However, with good management they can be controlled and minimised. Good planned maintenance is important, as is using the right contractors, and in
the case of leaseholders ensure the management agent is on the ball.
Shopping around for the right insurance is worth spending time on to.
However, often investors forget to ensure they are maximising income. This is not only about pushing rents up, but also ensuring the tenant is looked after so they are more likely to renew, and when tenants do leave that voids are minimised. All these actions have a direct impact on your overall gross to net calculation.
I am not belittling this issue, it is one we are focused on, but you need to look at the complete picture.