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How to Work Out and Calculate Rental Yield on your Marble Arch Property

By Eitan Fox  //  Mon 16th May 2022
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.
Calculating Rental Yield

Rental yields are critical to property investment. 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 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. 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 property investment. 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 rental yield and capital appreciation is essential to deciding whether a property is a good investment and planning how long to hold onto it before selling.

How to work out rental yield

There are numerous methods for calculating rental yield. The main formulas used are calculating gross rental yields and net rental yields. For gross rental yields, work out your annual rental income and divide this by the property value. Finally, multiply the figure by 100 to get a percentage.

To calculate the net rental yields, incorporate all your costs (such as landlord insurance and maintenance) into the formula.

The net rental yield formula is the most common one used for calculating rental yields. To calculate net 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. Finally, multiply by 100 to work out a percentage.

The formula:

yield = ((mrr x 12 – rc) / i ) x 100

  • mmr - monthly rental income
  • rc running 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. You can talk to a local estate agent or look at similar properties on Rightmove and Zoopla for a property you are considering buying. 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
  • Landlord insurance
  • 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, 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 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 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 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.

Four points to remember when calculating rental yield

There are four main areas to consider whilst calculating rental yields: rent, total costs, void periods and yield calculation formulas. 

1. Rent

Remember that you may not achieve the asking rent.

2. Total costs

It's essential to use actual figures to calculate the most accurate rental yield. For the total investment amount, include all costs, such as the following:

  • Cost of property
  • Estate agency fee for tenant acquisition
  • Landlord insurance
  • Mortgage and arrangement fee
  • Solicitor fees
  • Survey fees
  • Any other legal fees
  • Cost of redecorating and maintenance
  • Running costs during void periods
  • Costs of furniture and white goods

3. Void periods

There may be times of the year when the property is empty, for example, at the beginning of your investment or when searching for new tenants. It's unlikely to have an occupied property for the entire year, so it's important to consider this while calculating the rental yields.

4. Rental yield online calculators

Be cautious of the rental yield formulas used in online calculators as they tend to provide a more optimistic valuation which may not be accurate. Always use your own figures to work out your gross rental income and net rental income before deciding.

What is a good rental yield?

A good rental yield is very subjective and will depend on your investment strategy and goals. The higher the percentage rental yield, the better. Most investors regard a rental yield of 5% or more as a good return on your property. Even the 2.86% yield in the above example is much higher than the interest you'll receive from a savings account.

The best rental yields in the UK by area in 2022

Research into the top 10 buy-to-let areas in the UK ranked London sixth. The city has been a stable long-term property investment market, with a high demand for rental properties.

London came top in the best buy-to-let areas for new landlords. Renting to students is popular with new landlords due to the low acquisition costs, high annual demand and potential for high rental yields.

Source: Simply Business 2022

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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. 

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