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 and landlords use rental yield to understand a property's return on investment from a rental perspective. The money you make, or expect to make, from renting out your property is 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 (increase in market value over time). Property prices can also go down, causing depreciation.
Investors looking to fund their retirement may focus on capital growth. Landlords looking to top up their existing income typically focus on rental yield.
Every landlord and investor has a different objective, but understanding rental yield and capital growth is essential when you buy a property and plan how long to hold onto it before selling.
What is the difference between gross and net rental yield
Gross rental yield doesn't account for outgoings. Net rental yield generates a more accurate estimate by considering your expenses too.
How to work out rental yield
Rental yield formulas used in online calculators tend to be optimistic, so always use your own figures to make decisions. Here are the rental yield calculator formulas you need:
Gross Rental Yield Calculator
For gross rental yields, work out your annual rental income by multiplying monthly rent income by 12, and dividing this by the property value. Finally, multiply this figure by 100 to get the yield percentage of the property.
How to calculate gross rental yield percentage – the formula:
yield = ((mrr x 12) / i ) x 100
- mmr - monthly rental income
- i - investment
Net Rental Yield Calculator
To calculate the net rental yield, incorporate all your costs (such as landlord insurance and maintenance) into the formula.
The net rental yield formula is the most common. To calculate the net rental yield for a property, take the total rent received over a year and deduct your running costs. Divide this by the total amount invested in purchasing the property. Finally, multiply by 100 to work out the yield percentage.
yield = ((mrr x 12 – rc) / i ) x 100
- mmr - monthly rental income
- rc running costs
- i - investment
Things to consider when calculating rental yield
Estimating rental income
If you already rent out your property, you should have a good idea of the rent you can achieve. Otherwise, talk to a local estate agent or look at similar properties on Rightmove and Zoopla. Not every property earns the asking rent, so use conservative estimates.
Your property is unlikely to be occupied for 12 months every year, so stress-test your calculations using 10 and 11 months' rent.
Estimating running costs
For the most accurate estimate of rental yield, include all your ongoing expenses, such as:
- Buy-to-let mortgage interest payments
- Landlord insurance
- Letting agent fees or the cost of marketing your property and vetting tenants if you are going it alone
- Repairs and maintenance, including replacing furniture and redecorating
- Bills during void periods, such as council tax and utility bills
Calculating your investment amount
If you buy the property in cash, the investment amount is the purchase price and costs (stamp duty, survey, and solicitors fees). You should also add any costs of preparing the property to let, for instance:
- Buying furniture and white goods
- Redecorating and repairs
- Estate agency fees for tenant acquisition
- Mortgage and arrangement fee
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, your mortgage product, arrangement fees, and the costs outlined 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, working out at an annual rental income of £18,000. The purchase price of this property is £450,000.
Purchase costs include £20,000 stamp duty and £2,000 for the survey and legal fees.
A general rule of thumb is to put aside 1% of the property's value for repairs each year; this would be £4,500.
Purchased without a mortgage
Purchased outright 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) with a 3% interest rate. That would result in monthly payments of £900 or £10,800 annually.
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%
These figures are for illustration only. Every buy-to-let investment will deliver a different yield depending on the cost of the property and the rent charged.
What is a good rental yield?
A good rental yield is subjective, depending on your investment strategy, goals, and average rental yields in your area. The higher the percentage rental yield, the better. Most investors regard a 5% or more rental yield as a good return on your rental property. Even the 2.86% yield in the above example can be higher than the interest on a savings account.
How to maximise your rental yield
Try maximising your rental yield by reducing expenses, changing the rent amount, or reconsidering how you rent. Short-term lets, student accommodation and houses in multiple occupation (HMOs) can be profitable. However, they come with their own regulations and outgoings, so don't take the decision lightly.
We can help
Should you be considering letting your property, we would be pleased to advise you on a current market appraisal and answer any queries you may have about letting property. Contact us today.