How to work out your rental yield

With rental demand in the UK continuing to soar, now couldn’t be a better time to invest in your first buy-to-let property. When making your very first investment, you’ll have a long list of things to consider, from the property itself to its location, your budget and the current buy-to-let landlord costs, rules, and responsibilities. The rental yield that a potential buy-to-let property offers also makes for essential reading.

In this guide, we reveal exactly why rental yield is important, how to calculate your rental yield, and how much rental yield to look for when purchasing a buy-to-let property.

What exactly is rental yield?

Rental yield refers to the return you’ll make when renting out your buy-to-let property. When the rental yield is calculated, it is given as a percentage of the property’s price or value.

There are two types of rental yield – gross rental yield and net rental yield. Gross rental yield is the return you make before expenses, whilst net rental yield is the return made after expenses like the costs and fees of owning the property are deducted.

Why is rental yield important?

By calculating the rental yield of potential property investments, would-be landlords can determine whether a good rental return is possible, if the purchase price is correct for the property in question, and how much to charge their tenants for rent. For landlords unsure about which type of property to purchase as their first investment, rental yield can be used to compare property types and pinpoint the best investment.

The rental yield can also provide useful insights long after you’ve purchased your buy-to-let property, with factors like the housing market, interest rates and demand all impacting yield. By calculating and revisiting a property’s rental yield, you can keep track of the value of each property within your portfolio.

A declining rental yield can help you identify when is the right time to sell your buy-to-let property too.

How is rental yield calculated?

To calculate your gross rental yield, multiply your monthly rental income by 12. This will give you your annual rental income. Divide your annual rental income by the price you paid to purchase the property. Finally, multiply this by 100 to determine your gross rental yield as a percentage.

Calculating your net rental yield is a little different. Before dividing your annual rental income by the property purchase price and multiplying this figure by 100, deduct your annual costs. Landlord Vision details which costs should be deducted from your annual rental income to ensure an accurate net rental yield:

“The net rental yield of a property is the figure you arrive at after deducting all your expenses, for example, letting agent fees, maintenance costs, accounting fees, insurance, etc. You should also deduct purchase costs such as Stamp Duty Land Tax, as well as the cost of void periods. Do not deduct any costs covered by the tenant, such as council tax and water rates (if applicable).”

What’s a good yield in the current market?

Unfortunately, the rental yield you can expect depends on a variety of factors, including the property type and its location. A gross rental yield of 5 to 6% is good, whilst a yield of 7% or upwards is considered excellent.

There are various ways you can maximise your rental yield. Increasing the rent you charge your tenants, converting the premises into a HMO or house in multiple occupations, and looking for better deals for costs like mortgage repayments, maintenance, repair and property management can all help to increase those returns.

Image: Wasan Tita