Join CityClub Today to Receive:
Want a simple answer? The rental yield is the heart of the investment, especially if you’re looking for quick and easy additional income in the short term.
The rental yield is the potential return on investment you can attain through rent. To work out the percentage yield, you will need the value of the property and the annual rental income.
Step 1. Determine the Rent
Deciding on the rent is possibly one of the challenging things you can do as a landlord, especially if you lack the knowledge! Setting the most pragmatic rent prices will positively influence rental yields and the situation of your buy-to-let property.
No matter how tempting it may be to pluck rental figures out of the blue – please avoid this! Everyone wants to achieve the highest return on investment and maximise rental yields. It is natural to want to list your property for more than it is worth. Nevertheless, if you set your rental prices too high, you may risk being left with vacant property. Therefore, you may lose out on months of rent, which will affect your returns.
Similarly, if you want to let the property out as quickly as possible, you may decide to drop rates. Despite attracting a larger pool of potential tenants, you could potentially make a loss. Consequently, you will have less money to cover operational and maintenance costs. Therefore to maximise returns, it is best to calculate property costs.
Costs to run a rental property may include:
It is critical to figure out how much it would cost to operate your rental property. Knowing this information will give you a good indication of what you require to break even. Some mortgage lenders will require your rent to cover between 125% and 145% of the income cost.
How is the Gross Rental Yield Calculated?
Gross yield = Annual rental income / purchase price
The gross rental yield is the overall rental yield of the property. This percentage is generally higher than net yields because the calculation excludes expenses.
Calculating the gross rental yield is helpful for investors unaware of the specific costs of a property. In fact, it is advantageous if you are an investor who is comparing multiple investment opportunities. This method will allow you to analyse which investment will align with your property goals.
Here’s an example of calculating the gross rental yield:
Justin, a first-time property investor, is weighing out his options. Two investment opportunities have caught his eye. Let’s take a look at how we can compare the potential rental yields…
Option 1: The property is listed for £145,000, and Justin hopes to let the property for £750 a month.
Rental yield calculation:
Start of with calculating the annual rental income: £750 x 12 = £9000
Now divide this by the purchase price: £9000 / £145,000 = 0.062
To obtain a percentage, multiply the number by 100: 0.06 x 100 = 6.21%
Option 2: This property costs £180,000 and is in a similar location. Justin reckons he can achieve at least £790 a month in this property.
Annual rental income: £9480
Rental yield: (£9480 / £180,000) x 100 = 5.26%
From this quick illustration, calculating the rental yield, we can see that Justin will be able to secure a higher rental yield for option 1, so it is more profitable for him in the short term.
How is the Net Rental Yield Calculated?
Unlike the gross rental yield, the net yield provides the most accurate picture of an investment opportunity. It is a powerful metric which allows you to understand what you can realistically achieve. It differs from the gross yield because this percentage includes all the expenses associated with a property. Calculating the rental yield can be done in the following two ways:
Calculating the Rental Yield, is it Important?
If you are looking to start your investment portfolio or even if you are an established property investor, grasping the concept of rental yields is essential. As a buy-to-let property investor, you will want to achieve the highest return on investment possible to ensure your investment property is valuable.
Calculating the rental yield is a vital aspect. However, it is not the only one. If you are a regular CityRise reader or well-versed in the world of property investment, you will know of several important factors to consider.
Factors which you need to assess alongside rental yields include:
For instance, you may find an excellent yielding investment. However, this investment may have no potential for property price growth over the coming years. Therefore, the capital appreciation will be much lower, and over an extensive period of time, it may not be the most profitable decision. If the property sits in an area with declining rental demand, it may also affect the returns on investment.
As an investor, it is crucial to remember that market conditions will fluctuate naturally and therefore, it is best to do your research before investing.
Here are a few handy links below to prepare you to make the right decision:
Things to Avoid & Tips to Consider
At CityRise, we set realistic rents. When estimating potential rents, it is best to position them slightly below what is achievable. For this reason, we are proud to say many of our investors are returning clients who repeatedly invest through CityRise.
THINGS TO AVOID
– Avoid over-estimating the potential income of a property
– Stick to realistic figures after analysing market conditions
– Carry out thorough market research, gathering rental comparables in the area
– Don’t turn a blind eye to potential vacant periods
– Consider the impact if your tenant does not pay on time
– Count potential void periods of a minimum of 2 months a year
– Carry out a rigorous tenant screening process
– Maintain the property! A property in an excellent condition is more likely to generate a higher revenue than a run-down property
Landlord Guide: Why Energy Efficiency is Still Important
The EPC requirements for landlords, for new properties to have a rating of C or above by 2025, was scrapped last month. However, should a landlord...
How Can You Lower Bridging Loan Rates UK?
Many looking for a short-term financing solution in the UK often avoid bridging loans due to their interest rates. However, there are ways to better...
Best Cities in Yorkshire for Property Investment
We have already established Yorkshire as a prime investment spot for property with fantastic capital growth potential. From its skilled sectors and...
Bridging Loans: The Ultimate Guide
What are bridging loans and should property investors consider them? Our ultimate guide covers the costs, criteria, and process of bridging loans....