What is Rental Yield and how do I calculate it?
Rental yield is one of the most important considerations for any new or current landlord. It helps you decide whether or not a property is a sound investment, and it is also used as a factor for lenders when considering the affordability of buy-to-let mortgages.
As a landlord, whether you’re considering investing in a new property or reviewing your existing portfolio, knowing how to calculate rental yield is essential.
Read on to find out:
- what rental yield is
- our rental yield calculator
- how to work out net yield
- what is a good rental yield
- the best rental yields in the UK by area
What exactly is rental yield?
Rental yield is the financial return you are able to achieve on a rental property. It is calculated by dividing your annual rental income by the total value of the property, including initial purchase and any improvements that you have made or need to carry out in the future.
Rental yield is a key factor that buy-to-let investors and landlords can use to determine if their property is a ‘good’ investment. It’s also sometimes used by lenders when calculating the affordability of a buy-to-let mortgage.
You can calculate rental yield as ‘gross yield’ or as ‘net yield’ depending on whether you factor in the running costs of a rental property. The gross yield is generally the calculation used when speaking to a mortgage lender about a buy-to-let investment.
Rental yield v capital appreciation
While it’s good to know how to calculate rental yield, it’s important to remember that rental yield isn’t the only factor that may help you in your decision to invest in a property. You may also want to look to capital appreciation - how much the property has increased in value and is likely to increase in the future - as a consideration of whether a property is a good investment.
In the years following the housing price crash of 2007 however, many property investors have looked to invest in a steadier but stable rental yield rather than looking to capital appreciation. This is one key reason why rental yield has become such an important measure of a property investment’s financial performance.
Rental yield calculator
It’s easy to work out the rental yield for your property by using our simple rental yield calculator sum. Firstly, find your annual rental income amount, then divide this by the property value. Finally, multiply the figure by 100 to get the percentage.
For example, consider if you paid £100,000 for a flat and you received £200 a week in rent. This would bring your annual rent to £10,400.
£10,400 / £100,000 = 0.104. Multiply by 100 = 10.4%
How to work out net yield
What we’ve just calculated above is the ‘gross yield’ i.e. the rental yield without consideration for running costs and other expenses involved with a rental property. In reality, you’ll have some of these costs to consider so make sure you factor these into your calculations when deciding whether or not a property is a good investment.
Here’s a few things you need to consider when determining what is a good rental yield.
The premium amount will vary depending on the size of the property, the property type and its location. Typically, however, it’ll probably take up between 2 and 3% of the rent - although this may be higher if the property is furnished.
Landlord Insurance is not the same as regular home insurance. To find out more read our Landlord Tip ‘The differences between landlord and home insurance’ or get a quote quickly and easily. As a landlord you may also want to consider Rent Guarantee Insurance to protect you in case your tenants aren't able to pay their rent.
Replacing Broken Fixtures and Fittings
At the end of each tenancy, it’s likely there will be some broken fixtures and fittings due to natural wear and tear. A well-kept inventory is there in part to remind you which items are close to being on their way out so that you can factor in the costs of their replacements.
It’s also a good idea to re-paint every few years to make sure your property remains attractive to potential tenants and continues to merit its rental fees. If you hire someone to do this, it will add an additional cost on top of the price of the paint itself.
As well as the contents of your property, you’ll also need to factor in general maintenance costs for the property itself. The type, age and condition of the property will all affect the level of maintenance required, so keep this in mind when selecting your property.
The cost of upkeep and the types of things you’ll be spending on will vary from season to season. Spring is a good time to check your roof and guttering for any issues caused during wintertime, while cleaning your windows will become more important as more sun starts to shine through.
Summer is of course the time to get your outdoor area looking its best, and you might want to service your boiler while it’s not needed as much. As you move into the colder months, you may need to factor in maintenance costs such as insulating pipes and removing damp.
If the property is leasehold then you’ll also have to factor in ground rent and service charges. The lease should tell you how much you have to pay and how often you need to pay it.
There’s a good chance that your property won’t always be occupied. Periods without tenants are known as ‘void periods’ as there’s no rent coming in. Factor in this possibility and try to account for as much as one month’s rent just in case. Hopefully this won’t be a problem for too long.
If you use a letting agent or a managing agent, you’ll have to pay a fee. This could include marketing, advertising, property management, tenant referencing and inventories. It depends how much you’re asking the agent to do, but it can range from 10% to almost 20% in some areas of the country.
Mortgage or Loan
Of course, the largest sum will probably be your mortgage. Competitive deals are now available, but you’ll need to put up around 10% of the property’s value as a minimum; although even these are rare. Remember that even the deposit amount comes at a direct cost to you.
Once you’ve calculated all of the costs associated with running a rental property, deduct them from your rental income. Now when you re-calculate your rental yield sum, use this figure. This is your net yield, or ‘true yield’.
Finally, also remember that some of these costs can be claimed back against your tax bill, but it’s still wise to take them into account. We’ve published an in-depth guide about tax for landlords, so it’s well worth reading it before you get started. This way, you’ll know how your income will be taxed.
What is a good rental yield?
There is no golden number to aim for, but as a general rule you’ll need at least enough funds to cover your running costs and mortgage payments. You’ll also ideally be able to build up an emergency fund to cover the kind of expensive problems that pop up with property investment from time to time but are difficult to plan for – such as a burst pipe or a boiler breakdown.
The financial requirements associated with a property along with the characteristics of the local property market will influence what constitutes a good investment. Areas with high rental demand or below-market-value property may seem appealing initially, but knowing how to work out the rental yield will give you a much more accurate picture.
At the same time, while a property may offer high rental yields, it may also have a history of unreliable tenants and little chance of growing in value for re-sale. With these factors in mind, it’s important to do your research into rental yields and areas in equal measure.
The best rental yields in the UK by area in 2019
Earlier this year we reported on the Property Investment hot-spots for the UK. We detailed which areas in the UK were seeing investment figures rising for both rental yield and capital appreciation, outstripping the national averages, which can be seen in our Rental Index.
The top locations in the UK for rental investment in 2019 are as follows:
- North and East London - rental price 4.7% growth YoY
- Coventry - average rental yields of 5.4%
- Burnley - low average property prices coupled with growing demand
- Swansea - average rental yields of 5.97%
- Colchester - rental price growth of 6.5%
Read our full report if you’re considering where to make your next investment in property.