Rental yield is an important consideration that helps buy-to-let landlords figure out the overall value of an investment property. This applies to both prospective and existing investments, whether you’re weighing up the affordability of a buy-to-let mortgage or you’re thinking about how to maximise rental returns on a property you already let. Generally speaking, however, landlords use rental yield to calculate how much income they can generate from a property and, as such, the income gleaned from their buy-to-let portfolio as a whole.
As a landlord, it can be hard to determine whether or not a buy-to-let investment is worthwhile. So in this post, we’ll be showing you how to work out your rental yield. These calculations will give you a clearer picture of your annual rental income and help you ascertain ROI in many different aspects of your buy-to-let enterprise.
What is rental yield?
Rental yield is the rental return on a property expressed as a percentage of its total value. This basically tells you how much a landlord is (or will be) making from a property based on the amount of rent being paid by tenants per year and the market value of the property. Typically, the higher the rental yield, the better the investment.
Rental yield is just one of many factors used to determine the ROI on a buy-to-let property, with capital appreciation and market price also being important indicators of value. However, your rental yield gives an accurate picture of your annual income while letting the property, excluding any capital gains to be gleaned when you sell it. When purchasing a property, buy-to-let investors should take all of these factors into account; but when letting a property, they should specifically keep track of rental yield, especially when faced with constant changes in market conditions and government regulations. You can also use rental yield to compare one investment with another
How to calculate rental yield
To calculate your rental yield you only need two things: the annual rental income for a property (i.e. how much you receive in rent from your tenants per year) and the total value of a property (i.e. how much you paid for the property or how much it is listed on the market for) – oh yeah, and you’ll need some very basic maths. Once you have worked out these two simple figures, you need to do this quick calculation to work out your rental yield:
(Annual Rental Income ÷ Total Property Value) x 100 = Rental Yield (as a percentage)
It’s best to illustrate how this works with an example. Say you receive £9,000 in rent per year for a property valued at £175,000 – the calculation for rental yield would be as such:
(9,000 ÷ 175,000) x 100 = 5.1
This means that the property has a rental yield of 5.1% which is an average yield for properties with two or more beds in the UK. Remember to always use the figure for annual rental income, not weekly or monthly figures. As you can see, working out rental yield is by no means difficult. However, you may have to make some estimations if you have not yet purchased a property or you have been letting a property for a long time. For instance, landlords will have to estimate the annual rental income on a property they have not yet purchased or have yet to place tenants for. Such an estimate should be based on factors such as:
- Average rent prices in the area
- The type of property being let
- Local amenities and schools
- Nearby transport links
Likewise, you may also need to get an updated valuation for a property if it has not been on the market for a number of years. Although you may know what you originally paid for the property, its value in current market conditions will likely be much higher – you will need this updated figure for an accurate idea of rental yield. James Anderson, SW London-based estate agents, offer instant online valuations of rental properties right here – so what are you waiting for?
Two types of rental yield
It’s worth mentioning that we have only been discussing one specific type of rental yield so far. Indeed, there are a few different ways of calculating your rental yield from a buy-to-let property, each with different applications. Let’s take a quick look at what these are…
The specific type of rental yield we have been looking at so far is known as ‘gross yield’… No, not because it tastes weird or makes you squirm. It’s just a fancy term used to describe the rental return on a property before any outgoings and ongoing costs are taken into account. The results tend to be more generalised, which makes gross yield a perfect in more speculative situations where certain costs are unknown. Hence gross yield is the type favoured by estate agents and mortgage lenders, as well as in localised studies of average rental yields.
Unlike gross yield, net yield accounts for the everyday costs and expenses of letting a property, deducing it from the rental income for a more accurate picture of the returns on an investment – some call it ‘true yield’ because of this accuracy. Costs worth taking into account are as follows:
- Mortgage payments and stamp duty
- Estate agent fees and legal fees
- Maintenance and repairs
- Losses from void periods
- Insurance premiums
- Ground rent
The more costs you can account for, the more accurate your rental yield calculations will be. Once you have calculated the total amount of your annual outgoings, this is deduced from the annual rental income and the rental yield is calculated in the same way as demonstrated above. For clarity, you can calculate net yield as follows:
([Annual Rental Income – Annual Expenses] ÷ Total Property Value) x 100 = Rental Yield
If you are a prospective landlord currently looking to purchase a new property in South West London, feel free to check out the sales we currently have available or have a chat with a member of the James Anderson team.