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What Does Yield Mean in Property?
A rental yield is the annual returns an investor can expect from their property. It is received through tenants’ rental payments and expressed as a proportion of the property’s market value.
There are two ways to gain capital from an investment property:
1 – Through the passive income of rent received from the tenant.
2 – Selling the property at a profit or refinancing the property when it has appreciated in value, to release equity.
Rent should be strongly considered before purchasing a buy-to-let property, due to the net returns an investor will receive. This is one of the most important metrics when looking at property investment: determining whether the property has a good rental yield.
How To Work Out Property Yield
To work out whether a property offers the best net return, an investor needs to know how to calculate the rental yield of a property.
The formula to calculate a rental yield is: Annual Rental Income ÷ Property Value × 100
A property’s annual rental income is often a projection, especially when calculating the yield for an off-plan development. When coming to calculate property yield, an investor must first ensure the forecast rents are both achievable and realistic for the best outcome.
If ever unsure of whether an area or a buy-to-let has a good rental yield, it is best to seek aid from experts in the field. Using an investment agency instead of going alone helps landlords make more informed and secure decisions, down to market insight and due diligence.
Click here to use the CityRise property yield calculator.
What Is a Good Rental Yield?
Anything above 5% is seen to be a good rental yield and a fantastic return on investment. The average rental yield for the UK is currently 3.74%. Though, the North of England offers some of the best places to buy property, with the best rental yields for 2023.
The likes of Liverpool, Manchester, and Leeds have forecast yields reaching up to 6.5% – almost double the average for the whole country.
Rental income should cover the cost of maintenance and running the property so, while London may be desirable, investors may be at risk of losing money from lower yields and higher expenses.
What Type of Property Has a Good Rental Yield?
Off-plan developments are often the highest-yielding properties an investor can find on the market.
While investors are often hesitant at the idea of buying off-plan, they offer instant equity upon the completion of the development. Not to mention high rental prices. There are, however, a few more things to consider than usual when investing in off-plan properties. This can range from the desirability and demand of the location to the quality of the build and the reputation of the developer. But the right insight can help steer investors in the right direction.
Purchasing the property below its market value is certainly one of the main benefits of buying off-plan. Sometimes, investors may be able to secure a property 10-15% below the market value, when purchasing or during construction. This drops to 5-10% as the property nears completion. Off-plan properties generally need less maintenance as appliances are newly fitted and the build will be completed to a high standard, with a new-build warranty in place. Therefore, investors can maximise the return on investment.
Lower buying prices and high rental prices go hand-in-hand with off-plan investments. Due to their high specification and lower utility bills, rental demand is high. Investors are assured to experience a good rental yield on off-plan properties and a swift return on their investment. This is due to the desirability of the areas they are built in – and for new-build homes themselves.
Is buying a new build a good investment? In short, yes. Buying off-plan can cost an investor far less in the long-term, from its buying price to maintenance, while seeing a far higher net return. Rental demand is extremely high for new-build homes, so each offer a good rental yield for investors.
At CityRise, we work with developers that have had a complete due diligence check, making any investment a secure one. Our Investment Consultants are here to offer you their expert insight to steer you in the right direction.
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