If you’re already investing in property or are looking to become a landlord, you’ll at least know something about rental yield. In this article, we’ll discuss what rental yield is and what you should be looking at for a healthy return on your investment.
So, what is rental yield?
Rental yield is basically the value of the rent you can expect to receive from your property over a 12 month period.
Rental yield is calculated as a percentage by dividing the rental income over 12 months by the property purchase price. The higher the percentage, the better ROI you’ll get on your property.
How to Calculate Rental Yield
Working out rental yield is a pretty simple calculation but a very important thing to do before you go ahead and buy a house for the rental market in the UK. Here’s how you do it.
- Multiply the monthly rental income by 12.
- Subtract the costs of owning the property over 12 months.
- Divide the answer by the property's purchase price.
- Multiply that by 100 to get the rental yield percentage.
What is a Good Rental Yield?
As a landlord, knowing your rental yield is key to understanding what returns you’re getting for your property investment. And, if you’re a new investor, it’s important to get an idea of your expected yield to know if an investment is worth making.
Rental yield can vary around the UK depending on a number of different factors. As a minimum, the property’s rental income needs to cover all of the running costs of the property, including mortgage repayments, maintenance costs and letting agent fees.
Before considering buying a buy to let property, you need to plan for this to ensure you don’t end up out of pocket and spend your own capital on the property.
The sweet spot for rental yield is around 5-8%, another higher is a bonus, but most investors look to get a rental yield around this mark. You shouldn’t have to worry about any of the costs of running the property, and you’ll be making a very healthy return on your investment.
How to get a Higher Rental Yield?
If you’re looking at ways to drive up your yield, there are multiple ways that you can do this.
The most obvious solution is to increase the amount your tenants pay per month – this is the ideal solution. However, if you’re not priced competitively, you could put potential tenants off and having an empty property isn’t ideal.
Another option is to look at HMOs, which you can read about here. This is a great way to drive revenue if you’ve got a large property.
You could also look at cutting your costs. For instance, if you manage the property yourself, it’ll reduce agency fees. You will, however, have to keep up to date with legislation and falling afoul with any law changes could be far more expensive for you.
The other solution is to build your portfolio – if you have multiple properties at 5-7%, that’s when you really start to see a return on your investments. With HS2 and development projects coming to the North-West and property prices continuing to rise, the region looks like the perfect investment opportunity. For instance, yields in parts of Liverpool have approached 10% this year.
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Here at AF Property Investments, we only source the highest yielding investments in the best performing cities.
