HOW TO WORK OUT RENTAL YIELD
David Barr
October 15th, 2020
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Thinking of buying a buy to let? Before you do read this – rental yield explained.
Rental yield – it’s a ‘must know’ metric for anyone looking to invest in a buy to let, be it in a cheap area or somewhere ridiculously expensive.
Without a strong rental yield you’ll struggle to make a healthy profit, and in most cases find it tough to secure mortgage finance – a dilemma you don’t want to end up in. Which is why to help you avoid falling into this trap, we’ve compiled a ‘rental yield overview’ explaining why yield is a vital ingredient of any investment property as well as how to work out rental yield for yourself.
Your rental yield is the value that a property generates within the period of a year through rent. Yields are usually expressed as a percentage of the property’s value. Notice the plural ‘Yields’.
That’s because rental yield actually comes in two very distinct breeds:
- Gross yield – Call this your ‘core’ yield – it’s the overall figure you make from the deal, so basically your capital gain.
- Net yield – This is your gross yield minus any expenses you incur with the property. These could be repair costs and landlord insurance as well as any legal fees and stamp duty that you pay out for the property’s purchase. So in short, this is the figure you walk away with.
BMV deals with a small price tag are a great way to get you to develop a larger net yield. Cheaper properties cost you less to buy which means you have to pay less (if any) stamp duty as well as reasonably low maintenance and insurance costs, providing nothing major occurs.
Despite the complexity of rental properties and buy to let mortgages, working out rental yield is actually pretty simple. To work it out for yourself all you need to do is follow our rental yield formula:
Divide your annual rental income (i.e. gross yield) by your property’s value (the price you paid, not its market value) and times this number by 100.
Rental yield calculation example:
If a property worth £200,000 is generating £800 per month (£9600 per year) to calculate the yield, you’d do the following:
- Divide 9600 by 200,000 – this equals 0.048
- Times this by 100 and you get 4.8 – so that’s an overall gross yield of 4.8%.
- To get your net yield you’d simply do the sum again, only this time by deducting your costs from your yearly rental income. So for instance if your expenses are £2000 per year, the sum would look like this:
- Minus £2000 from £9600 – this equals £7600
- Divide 7600 by 200,000 – this equals 0.038
- Times this by 100 and you get 3.8 – a 3.8% net yield.
While rental yields are incredibly important tool for eyeing up a deal, for those who aren’t cash buyers, they can also determine your ability to secure mortgage finance.
Lenders use rental yields as part of their risk calculation when granting a buy to let mortgage, which is why as well as your acceptance, they can often influence you rate and term. All of which makes finding properties with a good rental yield even more valuable.
But speaking of a good rental yield…
When discussing rental yields, this is a common FAQ. And unfortunately, one that doesn’t come with a definite answer. Reason being it all depends on the property you buy.
The largest factor for determining rental yield is a property’s location, as it’s this that vastly governs its market value and potential rent. So, if you’re wondering how to find a good buy-to-let deal, then searching by area is often the way to go – especially if you’re chasing a high rental yield. And thanks to the internet and BMV property sourcers like us, finding these ‘good’ areas isn’t as complex as it sounds!
Let’s take it back to basics – here are just one of many tactics for finding ‘good’ buy-to-let…
- Identify some regions/ cities that you think may be ‘good’ areas to invest, find out their average rent/house price and (using the equation above) work out the rough rental yield for each area.
- Compare your list of areas by rental yield and expand your search. Maybe do some googling about if you’re struggling.
- Once you’ve found what appears to be an area with a strong rental yield, repeat this process but on a house-by-house basis. For this, you’d be best using properties that are currently for sale to ensure that your figures are in line with the current market. We’d make this a general rule of thumb when calculating rental yield.
- Ten, maybe fifteen properties later and you should have a strong sense of a property’s average yield in that area. Now all you have to do is repeat this process until you stumble upon a property offering a high return.
Fancy a head start? Here’s 3 areas that have been delivering a significantly high rental yield throughout 2020 – we’ll leave you to do the maths…
- Middlesbrough – The average 2-bed here costs £69,950 and has a median rent of £450 PCM
- Glasgow – The average 2-bed here costs £125,000 and has a median rent of £792 PCM
- Sunderland – The average 2-bed here costs £80,000 and has a median rent of £493 PCM
*Figures are by Zoopla & based on September 2020.
NOTE: While the overall rule is ‘the higher the yield the better the deal’, it’s worth noting that there are exceptions.
In some cases, a high potential yield could be a sign of underlying issues (subsidence, Japanese knotweed etc.) or legal restrictions (a restrictive covenant) that could prevent a property from being let full stop, or cost an arm and a leg to rectify. Moral of the story – do your research or at the very least invest in a survey!
But that’s not to say that all high yields are bad – far from it. As a professional property sourcing company with over 50-years industry experience, we’re armed with the know-how and expertise to help you grow your rental yield. Not only that but we take all the research off your shoulders, so you can focus your time on optimising and managing your portfolio – essential if you want to fully leverage your investments.
Sound too good to be true? Pick up the phone today to see how we can help you grow your rental yield in record time!
Start your property portfolio today!
Thinking of buying a buy to let? Before you do read this – rental yield explained.
Rental yield – it’s a ‘must know’ metric for anyone looking to invest in a buy to let, be it in a cheap area or somewhere ridiculously expensive.
Without a strong rental yield you’ll struggle to make a healthy profit, and in most cases find it tough to secure mortgage finance – a dilemma you don’t want to end up in. Which is why to help you avoid falling into this trap, we’ve compiled a ‘rental yield overview’ explaining why yield is a vital ingredient of any investment property as well as how to work out rental yield for yourself.
Your rental yield is the value that a property generates within the period of a year through rent. Yields are usually expressed as a percentage of the property’s value. Notice the plural ‘Yields’.
That’s because rental yield actually comes in two very distinct breeds:
- Gross yield – Call this your ‘core’ yield – it’s the overall figure you make from the deal, so basically your capital gain.
- Net yield – This is your gross yield minus any expenses you incur with the property. These could be repair costs and landlord insurance as well as any legal fees and stamp duty that you pay out for the property’s purchase. So in short, this is the figure you walk away with.
BMV deals with a small price tag are a great way to get you to develop a larger net yield. Cheaper properties cost you less to buy which means you have to pay less (if any) stamp duty as well as reasonably low maintenance and insurance costs, providing nothing major occurs.
Despite the complexity of rental properties and buy to let mortgages, working out rental yield is actually pretty simple. To work it out for yourself all you need to do is follow our rental yield formula:
Divide your annual rental income (i.e. gross yield) by your property’s value (the price you paid, not its market value) and times this number by 100.
Rental yield calculation example:
If a property worth £200,000 is generating £800 per month (£9600 per year) to calculate the yield, you’d do the following:
- Divide 9600 by 200,000 – this equals 0.048
- Times this by 100 and you get 4.8 – so that’s an overall gross yield of 4.8%.
- To get your net yield you’d simply do the sum again, only this time by deducting your costs from your yearly rental income. So for instance if your expenses are £2000 per year, the sum would look like this:
- Minus £2000 from £9600 – this equals £7600
- Divide 7600 by 200,000 – this equals 0.038
- Times this by 100 and you get 3.8 – a 3.8% net yield.
While rental yields are incredibly important tool for eyeing up a deal, for those who aren’t cash buyers, they can also determine your ability to secure mortgage finance.
Lenders use rental yields as part of their risk calculation when granting a buy to let mortgage, which is why as well as your acceptance, they can often influence you rate and term. All of which makes finding properties with a good rental yield even more valuable.
But speaking of a good rental yield…
When discussing rental yields, this is a common FAQ. And unfortunately, one that doesn’t come with a definite answer. Reason being it all depends on the property you buy.
The largest factor for determining rental yield is a property’s location, as it’s this that vastly governs its market value and potential rent. So, if you’re wondering how to find a good buy-to-let deal, then searching by area is often the way to go – especially if you’re chasing a high rental yield. And thanks to the internet and BMV property sourcers like us, finding these ‘good’ areas isn’t as complex as it sounds!
Let’s take it back to basics – here are just one of many tactics for finding ‘good’ buy-to-let…
- Identify some regions/ cities that you think may be ‘good’ areas to invest, find out their average rent/house price and (using the equation above) work out the rough rental yield for each area.
- Compare your list of areas by rental yield and expand your search. Maybe do some googling about if you’re struggling.
- Once you’ve found what appears to be an area with a strong rental yield, repeat this process but on a house-by-house basis. For this, you’d be best using properties that are currently for sale to ensure that your figures are in line with the current market. We’d make this a general rule of thumb when calculating rental yield.
- Ten, maybe fifteen properties later and you should have a strong sense of a property’s average yield in that area. Now all you have to do is repeat this process until you stumble upon a property offering a high return.
Fancy a head start? Here’s 3 areas that have been delivering a significantly high rental yield throughout 2020 – we’ll leave you to do the maths…
- Middlesbrough – The average 2-bed here costs £69,950 and has a median rent of £450 PCM
- Glasgow – The average 2-bed here costs £125,000 and has a median rent of £792 PCM
- Sunderland – The average 2-bed here costs £80,000 and has a median rent of £493 PCM
*Figures are by Zoopla & based on September 2020.
NOTE: While the overall rule is ‘the higher the yield the better the deal’, it’s worth noting that there are exceptions.
In some cases, a high potential yield could be a sign of underlying issues (subsidence, Japanese knotweed etc.) or legal restrictions (a restrictive covenant) that could prevent a property from being let full stop, or cost an arm and a leg to rectify. Moral of the story – do your research or at the very least invest in a survey!
But that’s not to say that all high yields are bad – far from it. As a professional property sourcing company with over 50-years industry experience, we’re armed with the know-how and expertise to help you grow your rental yield. Not only that but we take all the research off your shoulders, so you can focus your time on optimising and managing your portfolio – essential if you want to fully leverage your investments.
Sound too good to be true? Pick up the phone today to see how we can help you grow your rental yield in record time!
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