Rental Yield - How does borrowing affect it?

Hi there,

Some-time reader, First-time poster, learning lots, head spinning, still feel I have a long way to go but think its fantastic how everyone is so supportive.

 Bit confused how rental yield is affected by borrowing to finance purchase.

If property is valued at 104K, I borrow 60K at 4.8% to finance purchase and annual income is 2380, how does this affect yield?
Rental Yield  = Annual income / Cost of property x 100

Any advice would be greatly appreciated.

Borrowing doesn't affect the rental yield.

Still confused...

If it costs to borrow, surely that would affect your profit?? Any income you make would go on repayments. Surely the higher the cost of borrowing, the less you make...

Thanks for your reply.

Generally I always consider my net returns (exclusive of borrowings) ie Gross Rent less outgoings (insurance, rates, repairs/mtce etc) divided by purchase price (property, legals, sd & capital works).

As each investor has differing borrowing costs these are excluded from the calculations of determining net returns.

I will add that many people simply look at gross returns (or don't understand the fundamental difference) so they may be happy seeing a 5-8% return when analysing a property.

I am opinionated. Take me at face value, read between the lines.

http://www.reao.com.au/forum/entry.php?80-How-bright-is-your-agent

The interest on your borrowing affects your profits, and your return on investment, but the yield is simply the income / the property cost or value.

Thanks, now I understand that there is a difference between yield and profit.

I have two more queries:

1.What would you consider a good yield?

And

2. If the property cost 104k, is now valued at 90k, has outstanding mortgage of 60k (borrowed at 4.9%), with gross rental income of 2380 p/a.  Should I use capital earning interest at 0.5% to pay off mortgage, or continue to borrow at 4.9%?

Which makes better financial sense? Is it just simple Math; ie. its cheaper for me to spend than it is to save??

Thanks again

I know the figures don't look good, but times are hard in the UK. :(

A good yield is very subjective and closely related to the type of risk that you are exposed to. Risk varies greatly between each category of investment - residential ppty has a lower yield than say industrial or retail property (although I know that UK yields are generally lower than in Oz and lease terms of 10yrs plus are very common). You'd need to chat to a couple of estate agents to get a feel for what the norm is for yields in your area & for the asset class.

AS for which makes more sense, it greatly depends upon your financial situation (how you are structured, what you earn, the deductions available to you as an investor etc).

I am opinionated. Take me at face value, read between the lines.

http://www.reao.com.au/forum/entry.php?80-How-bright-is-your-agent