What is rental yield and how is it calculated?

Rental yield is one of the most important considerations for any new or existing buy-to-let landlord.

It helps you determine whether a property is a good investment, and is also used to determine the affordability of buy-to-let mortgages.

But what exactly is rental yield and how do you know what yours will be? We’ve put together a quick guide to help you work it out.

Rental yield definition

Rental yield describes your annual rental income, as a percentage of the total value of the property.

Rental yield is a key means by which buy-to-let investors and other landlords can determine whether or not their property is a good investment, and it’s also often used when calculating the affordability of a buy-to-let mortgage.

However, it’s important to remember that rental yield is not the only factor that might determine whether or not it’s a good idea to invest in a specific property.

You might also look at capital appreciation – that is, the potential increase in value of the property itself. This has been an overwhelming consideration for many landlords in the last couple of decades (as well as owner-occupiers), but as the housing market begins to slow, and with deep economic uncertainty on the horizon, many landlords are now looking for a slow and steady rental yield rather than dramatic capital appreciation.

Rental yield calculator

It’s easy to calculate the rental yield on an individual property. First, find your annual rental income for that property. Then, divide this by the property value. Finally, multiply the figure by 100 to get the percentage.

So, if your annual rental income was £12,000, and the property was valued at £200,000, your rental yield would be six per cent.

It gets more complicated when you’re trying to estimate the yield for a property that you haven’t yet bought, or for which you are yet to secure tenants. In these cases, you need to think about what might constitute a realistic rent. Do some research about average rents in the area, and consider factors like proximity to transport links, local amenities, and schools.

Rental yields UK at a glance

So where in the UK offers the best rental yields? Earlier this year, Simply Business reported on the latest LandInvest survey suggesting where buy-to-let investors’ money might be best spent. Romford came out on top, followed by Luton, Dartford, and Rochester.

The top ten areas in the UK for rental yield are as follows:

  1. Romford
  2. Luton
  3. Dartford
  4. Rochester
  5. Watford
  6. Enfield
  7. Southend-on-Sea
  8. Northampton
  9. Colchester
  10. Stevenage

But what about capital gains? Commuter belt towns in the South East performed best here, with Dartford posting increases of 17.75 per cent, followed by Watford at 17.17 per cent, and Ilford at 17.04 per cent.

Area Capital gains
Dartford 17.75%
Watford 17.17%
Ilford 17.04%
Enfield 16.97%
Bromley 16.56%
Romford 16.55%
Southall 15.53%
Twickenham 15.21%
Luton 15.19%
East London 14.78%

You can read the full breakdown of rental yields and capital gains in our guide to the best buy-to-let areas in the UK.

How high does the rental yield have to be before you’ll consider buying a property? Let us know in the comments.SE

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