Rental yield offers a valuable overview of whether a property is likely to be a profitable investment. It should be a landlord’s primary concern when buying an investment property in Marble Arch or other parts of central London.
But what exactly is rental yield, how do you calculate it, and what counts as a good investment? Here is a quick guide to help answer these questions and more.
What is rental yield?
Buy-to-let investors use rental yield to understand the return on investment of a property from a rental perspective. It is the money you make, or expect to make, from renting out your property expressed as a percentage of the amount invested in buying the property.
Rental yield v capital appreciation
Property investors also make money from capital growth or capital appreciation. This is the increase in the market value of the property over time. The value of a property can also depreciate.
Every landlord or investor is looking for something different from their investments. Investors looking to fund their retirement may pay more attention to capital growth, while landlords looking to top-up their existing income prefer to focus on rental yield.
In reality, understanding both rental yield and capital appreciation is essential to decide whether a property is a good investment and plan how long to hold onto it before selling.
How to work out rental yield
To calculate rental yield, take the total rent received over a year and deduct your running costs. Divide this by the total amount invested in purchasing the property.
yield = ((mrr x 12 – rc) / i ) x 100
- mmr - monthly rental income
- rc - costs
- i - investment
Estimating rental income
If you are already renting out your property, you should have a good idea of the amount of rent you can achieve. For a property you are considering buying, you can talk to a local estate agent or look at similar properties on Rightmove and Zoopla. Remember that the asking rent isn’t always what is achieved, so you should test your calculations with conservative estimates of rent.
Your property is unlikely to be occupied for 12 months every year. Stress-test your calculations using 10 and 11 months rent.
Estimating running costs
You will get the most accurate estimate of rental yield if you include all your running costs; this may include the following:
- Mortgage interest payments
- Letting agent fees or the cost of marketing your property if you are going it alone
- Repairs and maintenance including replacing furniture and re-decorating
- Bills during void periods (e.g. council tax and utility bills)
Calculating your investment amount
If you buy the property in cash, the investment amount is the purchase price plus buying costs (stamp duty, survey fees and solicitors fees). You should also add any costs you incur getting the property ready to let, for instance, buying furniture and white goods and decorating.
Most landlords need a buy-to-let mortgage to purchase their investment property. In this case, the investment amount is the deposit you put down plus your mortgage product and arrangement fees and the buying costs outlined in the paragraph above.
Example of rental yield on a Marble Arch property
A typical studio apartment in Marble Arch has a rental value of £1,500 per calendar month, and this works out to be an annual rental income of £18,000. The purchase price of this property is £450,000.
The buying costs include £20,000 stamp duty* and £2,000 in the survey and legal fees.
A general rule of thumb is to put aside 1% of the properties value for repairs each year; this would be £4,500.
*assuming normal stamp duty rates after the holiday period ends on 1st October 2021.
Purchased without a mortgage
Purchased out-right in cash the rental yield on the above property would be:
(18,000 – 4,500) ÷ 472,000 x 100 = 2.86%
Purchased with a mortgage
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.
To calculate the investment amount, take the deposit (£90,000) and add that figure to the buying costs* (£22,000). This gives a total of £112,000.
(18,000 – 10,800 – 4,500) ÷ 112,000 x 100 = 2.41%
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.
What is a good rental yield?
This is very subjective and will depend on your investment strategy and goals. Most investors regard a rental yield of 5% or more as a good return on your property. Even the 2.86% yield, if the property is bought outright, is much higher than the interest you’ll receive from a savings account.
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.