Top Letting Tip #1 – Calculating Rental Yields

This is first in a series of ‘Top Letting Tips’ and it is all about calculating your rental yields.

Rental yields are one of the most important considerations for any new or current landlords. Rental yield helps you decide whether or not a property is a sound investment and it is also used as a factor when considering the affordability of buy-to-let mortgages. 

SO, WHAT EXACTLY IS RENTAL YIELD?

The definition is as follows: Rental yield is what your annual rental income is, as a percentage of the total value of the property. It is used by buy-to-let investors and landlords as a key factor which determines if their property is a ‘good’ investment. It’s also used when calculating the affordability by a lender of a buy-to-let mortgage. 

You can calculate rental yield as ‘gross yield’ or as ‘net yield’ depending on whether you factor in the running costs of a rental property. The gross yield is generally the calculation used when speaking to a mortgage lender about a buy-to-let investment.

It’s important to remember, rental yield isn’t the only factor that may help you in your decision to invest in a property. You may also want to look at capital appreciation, this is how much the property increases in value, as a consideration of whether a property is a good investment. In recent years, following the housing price crash of 2007, many property investors have looked to invest in a more steady, but stable rental yield than look to capital appreciation, which is why rental yield has become such a key measure of a property investment’s financial performance.

RENTAL YIELD CALCULATOR

It’s easy to calculate the rental yield for your property. Firstly, find your annual rental income amount. Then divide this by the property value. Finally, multiply the figure by 100 to get the percentage.

For this example, you paid £100,000 for a flat and you received £200 a week in rent.

1. 
   

2. This would make your annual rent income amount – £10,400 (£200 X 52 Weeks).

3. £10,400 / £100,000 = 0.104.

4. Multiply by 100 = 10.4%

NET YIELD / TRUE YIELD

What we’ve just calculated above is the ‘Gross Yield’ (i.e. the rental yield without consideration for running costs and other expenses involved with a rental property). In reality, you’ll have costs to consider so make sure you factor these into your calculations when deciding whether or not a property is a good investment. Here’s what else you may need to consider (if applicable):

1. Insurance premiums

2. Replacing Broken Fixtures and Fittings

3. Maintenance

4. Ground Rent

5. Empty Periods

6. Agency fees

7. Mortgage or loan

Once you’ve calculated all of the costs associated with running a rental property, deduct them from your rental income. Now when you re-calculate your rental yield sum, use this figure. This is your net yield, or ‘true yield’.

Finally, also remember that some of these can be claimed back against your tax bill, but it’s still wise to take them into account.