Most commentators regard a rental yield of 7% or more as a good return on your property investment. Even the 3.87% yield, if the property is bought outright, is much higher than the interest you’ll receive from a savings account
The low supply of good quality rental homes in and around Marble Arch means landlords in this vibrant part of central London can generate healthy returns, despite the government introducing a 3% stamp duty surcharge on second homes.
To work out the level of return an investment property will deliver, landlords with property in Marble Arch or other parts of central London need to calculate the rental yield – the rental return as a percentage figure of the property purchase price.
What is Rental Yield?
Rental yield describes your annual rental income, as a percentage of the total value of the property. It is used by buy-to-let investors to determine whether or not a property will be a good investment or to understand the return on investment of a property they already own.
Rental yield v capital appreciation
Rental yield is not the only factor that determines whether a property is a good investment. Property investors also consider capital appreciation, that is the potential increase in the properties value. However, with increased uncertainty in the housing market, many landlords and investors are looking for steady rental yield rather than significant capital appreciation.
How to work out rental yield
Calculate rental yield using this simple formula:
Rental yield = (Monthly rental income x 12) ÷ Property value
To calculate your buy-to-let investment’s rental yield, take the total rent received over a year. Assuming a studio apartment in Marble Arch has a rental value of £1500 per calendar month, that would work out to be an annual rental income of £18,000.
Next, take the purchase price of the property (£450,000) and add that figure to its buying costs (£13,500 stamp duty* plus £2,000 professional services fees). That gives you a total of £465,500
Now perform the following calculation: 18,000 ÷ 465,500 x 100 = 3.87%.
From 1st April 2021 stamp duty on this property will be £26,000 making the rental yield 3.77%
What if I have a mortgage?
However, the above calculation assumes the investment property was purchased without the need for a mortgage.
To work out your rental yield taking the property loan into account, the annual mortgage costs must be subtracted from the £18,000 received in rent.
Let’s assume the investor takes out an interest-only buy-to-let mortgage for 80% of the purchase cost (£360,000) at a rate of 3%. That would result in monthly payments of £900 or £10,800 per year.
Subtracting that figure from the annual rent receipts of £18,000 leaves a pre-tax profit of £7200 per year.
To calculate the yield, take the deposit put down (£90,000) and add that figure to the buying costs* (£15,500). This gives a total of £105,500.
Now perform the following calculation: 7200 ÷ 105500 x 100 = 6.82%
*From 1st April 2021 stamp duty on this property will be £26,000 making the total buying costs £118,00 giving a rental yield of 6.10%
What is a good rental yield?
Most commentators regard a rental yield of 7% or more as a good return on your property investment. Even the 3.87% yield, if the property is bought outright, is much higher than the interest you’ll receive from a savings account – the best, easy-access rates available are currently around 1.16%.
Points to remember when calculating Rental Yield
Rental yield is not the only factor that determines whether a property is a good investment. The value of property in Marble Arch and other parts of central London is likely to appreciate in value if the investment is held for 10 years or more.
Bear in mind that it is unlikely that your property will be occupied for 12 months of the year. You should test your calculations using 11 months of rental income.
A landlord’s true income from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been paid. These can include variables such as maintenance, insurance and the fees charged by letting agents.
Calculate your rental yield more accurately by adding these costs to the property purchase price.
But even subtracting 25% from the £7200 annual pre-tax profit gives a yield of 5.12% on top of any appreciation of the property’s value.
If you are considering a property for it’s investment potential, you don’t yet know for certain how much rent you will achieve. You can look on property portals like Rightmove and Zoopla, or you could talk to a local letting agent. Bear in mind that the asking price isn’t always the amount that is achieved so you should test your calculations with conservative estimates of rental income.
Every buy-to-let investment can deliver a different yield depending on the cost of the property and the rent charged. For this reason, the figures quoted above are for illustration only.
We can help
Plaza Estates has a database of buy-to-let investors who have expressed an interest in a wide range of property in central London. If you want to maximise the sale value of your property, contact us
today and learn what it could be worth.