- Rental yield is a key metric for property investors, calculated as the annual rental income divided by the property’s purchase price.
- There are two types of rental yield: gross yield (before expenses) and net yield (after expenses). Gross yield is calculated by dividing annual rental income by the purchase price and multiplying by 100. Net yield involves deducting expenses from monthly rent to get monthly profit, then following a similar calculation.
- Good rental yields vary by location in the UK, with developed areas like London seeing 3-4% as good, while emerging cities like Newcastle upon Tyne might expect 10% or more.
Understanding rental yield and being able to calculate it, is a vital skill for any property investor. It allows us to quickly analyse different investment opportunities as well as compare them against each other. Let’s jump straight into this comprehensive rental yield guide.
What Is Rental Yield?
Rental yield is simply the rental income per annum divided by the purchase price of the property. It’s widely used within the property investing world because it offers investors an easy way to judge different opportunities.
It’s also a good indicator of where a certain location is in terms of growth as the more developed a city is, the lower the yield tends to be – this is because property prices rise a lot faster than rents do. Lower yields are also a good indication that the area has a higher chance of experiencing good capital growth.
How To Work Out Rental Yield? (Gross vs Net)
When calculating rental yield, It’s important to note that there are two types of rental yield: gross and net. There are some differences between the two so how they’re calculated is also different.
Gross Rental Yield
This is calculated before expenses.
- Monthly Rental Income x 12 = Your Annual Rental Income
- Annual Rental Income / Property Purchase Price
- Mulitply by 100 to convert figure to %
- This will give you your gross rental yield
Net Rental Yield
This is calculated after expenses so there are a few extra steps.
- Subtract all expenses from your monthly rent to get your monthly profit
- Monthly profit x 12 = Annual Rental Profit
- Annual Rental Profit / Property Purchase Price
- Multiply by 100 to convert the figure into %
- This will give you your net rental yield
What Is a Good Rental Yield In the UK?
As with a lot of things in property investment, what is considered a decent rental yield heavily depends on the location of the property – you can’t simply apply a one size fits all figure to the entirety of the UK because every area will be at a different point of development. Areas such as London that are considered well and truly developed may see yields of 3-4% as really good whereas up-and-coming cities such as Newcastle upon Tyne would consider rates of 10% and upwards as a fantastic return on a rental property.
Another reason why it’s hard to give you a ballpark figure is because yields on a rental property change along with mortgage interest rates. So rental yields that were considered bad in a certain area back when mortgage rates were 2% may now be incredibly good if mortgage rates are 4%.
As you can see, it’s a difficult question to answer. However, I don’t want to leave you empty handed so here’s a table containing what would be considered a good yield on a rental property for different UK cities:
|Average Property Price
|Gross Rental Yield
What Costs Affect Rental Yield?
When assessing rental yields and determining the potential profitability of a rental property, it’s crucial to consider the various costs that can impact your rental returns. Here are some key cost factors to keep in mind (for a more detailed breakdown, view our buy-to-let costs breakdown with a real example):
1. Initial Purchase Costs
Mortgage Deposit: This is the upfront amount you contribute towards the property purchase. For a buy-to-let property, this is typically 25% of the property’s value.
Stamp Duty: The tax levied on the property purchase price, which varies depending on the property’s value and other factors.
Legal Fees: Expenses incurred for solicitors or conveyancers to handle the legal aspects of the property purchase.
Brokers and Surveys: Costs associated with mortgage brokers or advisors, as well as property surveys to assess the condition of the property.
2. Costs Involved in Preparing the Property
Decorating: Expenses for any necessary cosmetic improvements, such as painting, flooring, or minor repairs. If you’re purchasing a turnkey property, these will be limited but for houses with major defects, the costs may add up quite quickly (although for these sorts of properties, it’s best to buy refurbish and refinance them).
Electrical and Gas Safety Checks: Costs associated with obtaining safety certificates to ensure compliance with legal requirements around gas and electric safety.
Lettings Agents: If you decide to use a lettings agent (we would highly recommend this), there will be a fee involved – usually around the mark of 4-6 weeks worth of rent.
3. Monthly Running Costs
Mortgage Repayments: The regular payments required to repay the mortgage loan.
Insurance: Landlord insurance protects against potential risks, such as property damage or liability claims. Again, this is optional but highly recommended.
Optional Management Costs: If you choose to hire a property management company, there may be fees associated with their services, including rent collection and property maintenance.
Understanding how rental yields work and being able to calculate them is a vital skill for any property investor or landlord to possess as it allows for quick comparisons between different locations and properties. It’s also a great way to quickly assess a potential property investment to see if it meets your criteria – for example, if you looking for a high cash-flowing property, you only need to look at the average rental yields in the chart above to know that cities in the South of England are definitely not for you.
Rental yields are a great tool but a better alternative (especially if you’re doing in-depth property due diligence on a specific deal) is the Return on Capital Employed (ROCE) – this gives you a better idea of what your returns will look like based on the amount of money that you have invested into the deal and is considered a far more accurate measure of whether a property investment deal is good or not. Calculating it is a bit harder but no need to worry because there are free tools out there that will do the calculation for you – such as Lendlord’s property deal analyser.