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POSTED 13 November 2018 Lettings

Understanding Rental Yield

The ultimate goal of buying a buy-to-let property is to turn a profit on your investment.

While there is no guarantee of this happening, rental yield can help you to make an informed decision on the financial practicalities of a particular property purchase.

Why is rental yield significant?

Rental yield is an extremely important measurement for anyone who’s thinking of purchasing a property.

The metric expresses the annual rental income of a landlord as a percentage of the total value of a property. Although it’s not the only factor you should consider, this figure can help you to determine whether a property is a good investment or not. It can also help you to determine the affordability of a buy-to-let mortgage.

How to calculate rental yield?

If you own a property outright, calculating rental yield is quite straightforward. You just need to divide the total rent for a year by the purchase price of the property, then multiply that figure by 100 to get a percentage.

You may also want to estimate the rental yield on a property you’re considering buying. In this case, you will need to know the purchase price of the property (or have an accurate idea of its current market value) and its annual rental income – you can get a realistic idea of this by checking the typical rent of other similar properties in the area.

If you’re one of the many landlords in the country who has an outstanding mortgage on a property, things get a little more complicated, but there is still a formula that you can follow.

1.     Calculate the upfront cost of buying the property – including additional costs such as local search fees.

2.     Work out the total mortgage repayments for a 12 month period and calculate how much rent the tenants in the property pay over a 12 month period. Then subtract your annual mortgage from the total rent figure – this gives you your gross rental income.

3.     From your gross rental income, deduct your running costs (such as maintenance and void periods) to get your net rental income.

4.     Finally, take your net rental income and divide it by your initial investment (the figure from the first step) and multiply the sum by 100 – this is your net rental yield.

In the first few years of owning a property, you can expect your mortgage repayments to be more than your rental yield. However, over time this should reverse.

Maximising your rental yield

Any rental yield of around 8% and above can be considered pretty respectable. It is, of course, natural to want to get this figure as high as possible.

The obvious way to do this is to increase rent. On the other hand, you may actually want to consider decreasing rent to avoid any sustained void periods – which can be extremely draining on resources. You could also consider lowering your overheads.

This could be something quite drastic, such as re-mortgaging your property, or simply searching around for more economically friendly plumbers and electricians.