Knowing and understanding rental yield is crucial to landlords understanding just how good (or bad) a property investment is.
Rental yield will also tell you how a particular property compares to others in the area, helping you to make a sound decision on whether to buy or walk away.
In this guide, we’ll explain what rental yield is and how you can calculate it…
What is rental yield?
Rental yield measures the gap between what you spend on a property and the income you make from renting it out.
Essentially, rental yield tells you how profitable your property is, giving you a great idea of the return you’ll receive on your investment.
Comparing rental yields for different properties can also help you decide on which to invest in.
Why is rental yield important?
Rental yield tells you how profitable your investment is, which is hugely important when assessing or comparing properties.
A higher rental yield means better cash flow and more profit over time.
Rental yield is particularly important if you’re basing your property investment strategy more around income and less around capital growth.
What is a good yield on a rental property?
A good rental yield will generate enough cash to cover all your expenses when it comes to your rental property, including:
- Your buy-to-let mortgage repayments
- Running costs
- Management fees
- Landlord insurance
- Maintenance and repair costs
The higher your rental yield, the better your cashflow and the more financial sustainable your rental property will be as an investment.
What’s the difference between gross rental yield and net rental yield?
Gross rental yield tells you how profitable your rental property is before costs and expenses.
Net rental yield, meanwhile, considers all your costs and will give you a much more accurate view of your rental property’s profitability.
Gross rental yield is easier to calculate than net rental yield but will only give you a baseline idea of your returns.
How do you calculate rental yield?
Calculating gross rental yield only considers your property’s purchase price and annual rental income, so is fairly easy to calculate.
Net rental yield, on the other hand, factors in all your expenses and costs and while this provides a more accurate reflection of your property’s profitability, it is more complicated to work out.
Here’s how to calculate both gross and net rental yield…
Calculate gross rental yield
To calculate gross rental yield, divide your property’s annual rental income by its purchase price / value and multiply that figure by 100.
Your annual rental income is £14,000 and your property’s value is £230,000.
14,000 ÷ 230,000 x 100 = 6%.
Calculate net rental yield
To calculate your net rental yield, add up all your fees and expenses that come with renting out the property.
Subject your total annual expenses from your annual rent, then divide that number by the property’s value or purchase price, before multiplying by 100.
Your total annual expenses are £5,000, your annual rent is £14,000 and your property’s value is £230,000.
14,000 – 5,000 = 9,000
9,000 ÷ 230,000 x 100 = 3.9%
Average UK rental yields
While rental yields can vary hugely across the UK and even in specific regions, we’ve looked at house price and rental data from Dataloft Inform to calculate yields in some Parkers property hotspots.
Avg monthly rent
Avg annual rent
Of course, these yields are based on average sale and rental figures across the specified postcode areas, and greater or lesser yields can be found depending on specific area, price, and monthly rent.
How to boost your rental yield
There are steps you can take to help maximise the rental yield you achieve with a property, including:
1. Buying at the right price
To really help maximise your rental yield, it’s important to purchase the property you wish to rent out at the right price.
Buying for as low as price as possible will give your rental yield an immediate lift.
2. Achieve as high a rent as possible
Have the monthly rental value of the property you’re looking to buy assessed by a local letting agent.
By buying in an area with high rental demand, you’ll give yourself the best chance of maximising your monthly and annual rental income, thus giving you a stronger yield.
3. Make sure your rental is high quality
By spending on renovation work before you rent your property out, you can make your property more appealing to potential tenants.
Think about what your potential tenants would want and deliver it.
If your property stands out from the competition, there’s a good chance tenants will pay a premium to rent it.
Don’t forget: Whilst rental yield is important, you should factor in the increase in the value of your property. The highest yields are usually in areas with the lowest capital growth and vice versa. For example, prime London often has very low yields compared to the North East, but the increase in value can be huge.
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