Understanding your rental yields is a fundamental part of becoming a landlord. As a property investor, you will need to identify what a desirable yield is and be able to calculate it. Let’s take a look at rental yields, what they are, and why they matter.
What is a rental yield? The term ‘rental yield’ refers to the potential amount of money your property can make through rental income. This is often expressed as a percentage of the market value of the property. While yields can be calculated for any period, annual yields are most commonly used.
Why do rental yields matter? When it comes to investing in property, obtaining a good return on investment (ROI) is an important objective. Before purchasing a buy-to-let property, you should work out what to charge for rent to make your investment worthwhile.
Working out your potential yields ensures that you aren’t selling yourself short or overpricing your property. For example, if your potential income falls short of your expenditure, or if you only manage to break even, something as seemingly trivial as a boiler repair could leave you out of pocket.
On the other hand, if what you’re charging in rent exceeds the market rate, you may struggle to obtain tenants.
What’s the difference between gross and net rental yield?
Gross and net rental yields might sound like complicated business terms, but the difference between the two is simple:
- The gross rental yield is the total amount of money your property makes before expenses. This is calculated using the price of the property and the income generated by the property.
- The net rental yield is everything you make after expenses. You can calculate this by adding the price of the property to the income generated through rent, and then subtracting the associated fees and costs of owning the property.
How to calculate your rental yield?
- Multiply your monthly rental income by 12 to get the annual figure
- Divide that figure by the property’s purchase price
- Multiply that figure by 100 to get your gross rental yield percentage
MONTHLY RENTAL X12 = ANNUAL RENTAL INCOME
(Annual Rental Income/Purchase Price) x 100
= Rental Yield Percentage
If your tenants pay rent weekly, multiply the figure by 52 to get your annual rental income.
If you haven’t bought the property you’re interested in yet, use the current market value and your anticipated rental income to determine the rental yields.
What counts as a good rental yield? There are no hard and fast rules in what constitutes a ‘good’ rental yield. But generally, if your property pulls in a gross yield of 5-6%, you can consider this a ‘good’ ROI, and anything above 7% is ‘very good’.
How to maximise your rental yield
Rental income can vary widely across the board, depending on external factors such as location, the wider economy, and fluctuations in demand. However, there are a few ways to ensure you’re getting the most out of your rental yield:
Adjust the rent If your tenancy agreement allows it, you may be able to increase your rent if it’s currently less than the local market rate. On the other hand, if you’re charging higher rent than similar properties in your area, lowering it a little bit could boost tenant interest and subsequently lower your void periods.
Adjust your outgoings You can make significant savings by simply assessing and adjusting your property’s outgoings. From remortgaging and finding a better deal to working with a letting agent who will carry out maintenance for you, identifying and cutting down on unnecessary expenses can make a huge difference in your net rental yield.
Keep on top of regulations Legal disputes are extremely costly and detrimental to rental income, so it’s vital to keep on top of current health and safety regulations when running a rental property. Our dedicated team are experts in maintaining rental properties, ensuring full legal compliance, a great reputation for your property, and peace of mind for you.
