When choosing a rental property, owners will naturally be looking to make a return on their buy to let investment. This is commonly achieved through establishing a high rent, but how can landlords determine the returns they will see, this is where understanding rental yield is essential. How to Work Out Rental Yield.
What Is Rental Yield?
Simply put rental yield is the monitory returns a landlord sees on their buy to let investment property. This prediction is typically represented through a percentage, showing the landlord if they will be able to cover buy to let mortgage repayments, emergence remedial and maintenance work, alongside agency fees with the level of rent they’re expecting their tenants to pay each month
What Is a Good Yield on a Rental Property?
Typically speaking landlords will commonly look for at least a rental yield of 7%. This threshold is established as it has been commonly found that anything below this will not allow the landlord to cover any expenses that they may incur over the tenancy.
As stressed the rental yield must be substancial enough to allow the landlord to cover any expenses associated with maintaining a tenancy and a rental property. Although landlords will typically take out insurance to cover numerous eventualities throughout the tenancy, their rental income will need to account for any appliances or furnishings that may need replacing, void periods, marketing costs, management fees, insurance charges and mortgage payments; and if their rental yield does not account for these expenditures landlords will likely find themselves in debt.
As of July 2021, Hull offered property investors the best returns, seeing landlords benefit from rental yields of 9.2% Glasgow and Stoke followed shortly behind with owners seeing rental yields of 9.1% and 8% respectively.
How Is Rental Yield Calculated?
The rental yield of a property can be easily calculated through dividing the amount the residents pay each year in rent by the value of the rental. Multiply this figure by 100 and you will have the gross rental yield for the property.
For example, if you paid £70,000 for a flat and you received £400 a month in rent. This would bring your annual rent to £4,800
£4,800 / £70,000 = 0.0686
Multiply by 100 = 6.8%
For a more accurate representation of the rental yield, owners can subtract their essential outgoings from the annual rental income before dividing by the amount paid for the rental and multiplying by 100.
What Is the Difference Between Gross and Net Yields?
Simply put the gross rental yield is determined by assessing the amount paid for the property against the rental income generated by the tenants each year. However, the net rental yield also accounts for any expenses the landlord may incur during the course of the tenancy.
The gross rental yield will typically see application by mortgage lenders as the exact costs that would come with owning a property will not yet be apparent. However, the grow rental yield can also be used by investors that are simply comparing available rental opportunities.
Maximising Your Rental Yield
It goes without saying that understanding rental yield is essential for all rental property owners. Knowing how to maximise a rental yield will go a long way in not only navigating your existing tenancies, but expanding your property portfolio.
Naturally, the rate at which your rent is set dictates the rental yield gained from the property, therefore if this falls below the market rate it would be advisable for rental property owners to increase the amount of rent their tenants are expected to pay each month. However, it would be advantageous to first assess the demand for rental property throughout the area as if this is underwhelming then landlords will need to establish a more competitive rent to attract prospective occupants. If this monthly figure is too high landlords may risk pricing out parties that would otherwise be an ideal tenant, putting them at risk of having a vacant property for an extended period.
Houses in multiple occupation have also been hailed by investors as a dependable way of generating a high rental yield. Naturally, a HMO would allow the landlord to collect multiple rental income from the tenants that reside within the property. With this being said landlords will need to first obtain a mandatory license and adhere to stricter health and safety regulations before a tenancy can commence.
What is Capital Growth?
Similarly to rental yield, capital appreciation is an essential consideration for any property investor. Whilst a high rental income of often synonymous with short-term returns, landlords that seek out a profit through capital growth on their property are looking for a longer-term, secure investment.
Capital growth is the amount a rental property has increased in value once the landlord decides to sell on the opportunity. This will typically see investors look for “up and coming” areas that once developed will experience soaring property prices.
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