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.
Rental yield helps you decide whether or not a property is a sound investment, and it is also used as a factor when considering the affordability of buy-to-let mortgages.
So, what exactly is rental yield?
The Rental Yield definition is as follows: Rental yield is what your annual rental income is, as a percentage of the total value of the property.
Rental yield is used as a key factor that buy-to-let investors and landlords can determine if their property is a ‘good’ investment. It’s also sometimes used when calculating the affordability by a lender 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.
It’s important to remember, 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, this is how much the property increases in value, as a consideration of whether a property is a good investment. In recent years, following the housing price crash of 2007, many property investors have looked to invest in a more steady, but stable rental yield than look to capital appreciation, which is why rental yield has become such a key measure of a property investment’s financial performance.
Rental yield calculator
It’s easy to calculate the rental yield for your property. 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, you paid £100,000 for a flat and you received £200 a week in rent. This would make your annual rent £10,400.
£10,400 / £100,000 = 0.104. Multiply by 100 = 10.4%
Net yield / True 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 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 what you need to consider:
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 also be higher if the property is furnished. Landlord Insurance is not the same as regular home insurance, and may not cover you for the unique risks you face as a landlord. 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 consider Rent Guarantee.
Replacing Broken Fixtures and Fittings
At the end of each tenancy, it’s likely there will be worn out fixtures and fittings. You’ll also need to factor in the need to re-paint every few years, too.
You’ll also need to factor in maintenance costs. 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.
If the property is leasehold then you’ll also have to factor in ground rent and service charges.
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 even account for as much as a month’s rent just in case. If you buy well and set the rent appropriately, hopefully this won’t be a problem for 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. Even the deposit amount comes at a direct cost to you, so remember that.
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 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.
UK Rental Yield Hot Spots 2019
Where in the UK offers the best rental yield. Earlier this year, HomeLet reported on the Property Investment hot-spots for the UK 2019. 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 2019 are as follows;
- North and East London, Rental price 4.7% growth YoY
- Coventry, average net rental yields of 5.4%
- Swansea, average rental yields of 5.97%
- Colchester, Rental price growth of 6.5%