Buy-to-let basics: Calculating your rental yield

Whether buying in East Anglia or another property hotspot, determining if the investment you are about to make will be a profitable one is important.

As we discovered in our guide to the true costs of being a landlord, those expenses certainly add up, with buy-to-let mortgage costs, income tax repayments, safety inspections and certification, property management fees and landlord licensing all needing to be accounted for. With this in mind, ensuring your landlord costs are covered by the income generated by your rental property is the key, which makes your rental yield essential reading.

What is rental yield?

Rental yield is the income that a rental property generates as a percentage of its total purchase value. The yield essentially tells you what percentage return you’ll make compared with the amount you paid originally when purchasing the property.

While the calculation for determining rental yield is pretty straightforward (more on that later!), it is important to note that the rental yield itself is not set in stone. Many factors can impact rental yield, with everything from rental demand and the popularity of your buy-to-let’s location to fluctuating house prices and interest rates affecting yield over time.

Why is rental yield important?

The rental yield of your, or a potential, buy-to-let investment not only tells you the level of return you can expect to make. Long term, as your portfolio continues to expand, the rental yields of your buy-to-lets can help you identify and track the value of your property investments.

Gross vs. net – what’s the difference?

There are in fact two types of rental yield figures to consider – gross and net. Gross rental yield is the income generated before your landlord costs are deducted. While net rental yield is the yield post-deductions. In both instances, it is the gross rental yield that is calculated first.

How can you calculate rental yield?

You’ll need just two things to calculate your gross rental yield, and not one of them is good maths skills!

You must be aware of your annual rental income – i.e. your monthly rent multiplied by 12 – and the price you paid (or intend to pay) for the buy-to-let property in question. Divide your annual rental income by the property price, before multiplying by 100 to calculate your rental yield as a percentage.

To calculate your net rental yield, simply deduct the annual cost of any expenses, such as property maintenance, management fees and mortgage repayments.

What’s considered a good yield?

As well as knowing how to calculate rental yield, knowing what’s a good rental yield and what’s not is essential to your success as a buy-to-let landlord. Here PropertyData shares the latest on what’s considered a good yield and what the future could bring for those willing to wait it out…

“As of 2023, the estimated rental yield is around 4.75%. So anything above this number would qualify as a good rental yield. You can often find slightly higher yields by moving north up the UK to areas like Manchester, Sheffield and Newcastle. Moving forward, it’s being predicted that rent across the UK will rise by up to 9.5% over the course of the next five years. London, understandably, will look to experience the most growth of around 12.5%.”

Need help financing your buy-to-let purchase and turning that rental yield into a reality? Get in touch with our experts to find out more about your buy-to-let mortgage options.