What is Rental Yield and why is it Important to Property Investors?
Rental yield is the rental return an investor will achieve on a property through rent on an annual basis. Rental yield is always calculated as a percentage by dividing the rental income by the price paid for the property.
For property investors, ensuring a property delivers a good rental yield is of paramount importance. A savvy investor will use the monthly rental income to cover the property’s running costs. These expenditures can include mortgage repayments, property maintenance, taxes and fees and other expenses associated with owning a property. If monthly rental income falls short of costs, landlords will lose money. Ideally, any investment property should be a sustainable investment, and ensuring a property can pay for itself month to month is one of the key aspects of building a solid investment portfolio.
What is a Good Rental Yield in the UK?
As mentioned, ideally, rental yield will generate enough monthly cash flow to cover ongoing expenses like mortgage payments, running costs, management fees, buy-to-let landlord insurance, repairs and any unforeseen expenses that can crop up. Generally a good average yield for a UK buy-to-let property is 5% or higher. If the monthly rental yield falls below this percentage, it can be difficult for landlords to cover expenses which might lead to an investment going into the red. This figure can be higher or lower depending on the specific property, location and market conditions.
Sometimes, a rental property can present investors with the unexpected. The higher the rental yield, the more sustainable your property is likely to be in the long term. A higher rental yield – something closer to 8% – would give investors a contingency budget should costs increase with little warning.
While areas that have strong capital growth or where you can find a good deal can be extremely tempting, for a sustainable investment, ensuring monthly rental return can, at the very least, cover baseline costs is extremely important. Prioritising capital growth over monthly returns may make a property become a less than profitable investment.
How do you Calculate a Property’s Rental yield?
The rental yield of a property is a key metric for evaluating the potential return on investment for any real estate purchase. To calculate the rental yield on a property, you need to take the annual rental income the property will generate then divide it by the price paid for the property before multiplying the figure by 100. As an example, a rental property bought for £200,000 and bringing in annual rental income of £10,000 would have a 5% rental yield. Rather than doing the hard math, you can use an online rental yield calculator tool to quickly work out the rental yield on a property.
Calculating rental yield using rent and purchase price is the most basic way to calculate the rental yield of a property. This gives you an idea of gross rental yield – everything before the expenses. However, calculating the net rental yield of a property will give you a much more accurate view of your investment, because it takes into account outgoings to give you the rental yield after expenses. While gross rental yields are easier to calculate, they can make the yields appear higher than they actually are. Investors should be sure to calculate the net yield of a property, taking into account monthly outgoings and expenses such as agency fees, maintenance, tax, insurance, mortgage costs etc. to get a clear picture. It’s important to factor these costs into your calculations when assessing potential ROI on an investment property. A good net rental yield should be between 5-7 %, which will ensure you are still making a decent return on your property after the usual outgoing payments.
