Understanding rental yield is crucial for managing your property sustainably. It helps you understand whether a property is a good investment, and if you’ll be able to cover the costs of the property.
Our guide explains what rental yield is, why it matters, and how to calculate it.
What is rental yield?
Rental yield is the financial return you make on a property investment through rent. It’s expressed as a percentage of the property value.
Landlords use rental yield to understand the financial performance of their property and to make sure it remains a sustainable investment.
Why does rental yield matter?
A good rental yield helps make sure your rental income can cover your expenses. And allows you to afford necessary maintenance, stay on top of safety regulations so your property remains a safe and comfortable home for your tenants.
Beyond covering expenses, rental yield is also a key indicator of your property’s overall financial health. A strong yield provides a buffer against unexpected costs so you can adapt to circumstances like repair emergencies or periods of vacancy.
It also impacts your ability to secure financing for future investments, as lenders often assess yield when determining loan amounts and terms.
What is the difference between gross and net rental yield?
Gross rental yield looks at your return before any expenses are deducted. It uses the property price and your total rental income.
Net rental yield gives a more accurate picture of your actual rental yield because it includes all your property expenses.
How to calculate gross rental yield
Calculating your gross yield is simple. Just follow these three steps:
- Multiply your monthly rent by 12 to find your annual rental income.
- Divide your annual rental income by the property purchase price.
- Multiply that figure by 100 to get your gross rental yield percentage.
Example of a gross rental yield calculation
If you buy a property for £200,000 and charge £1,000 a month in rent. Your annual rental income is £12,000.
Divide £12,000 by £200,000, which gives you 0.06. Then multiply this by 100, and your gross rental yield is 6%.
How to calculate net rental yield
Net rental yield shows your true return by factoring in the costs of being a conscientious landlord. Here is how to calculate it:
- Multiply your monthly rent by 12 to get your annual rental income.
- Subtract your annual costs, such as mortgage payments, maintenance, and insurance.
- Divide this number by the property purchase price.
- Multiply the result by 100 to find your net rental yield percentage.
Example of a net rental yield calculation
So for a £200,000 property with a £12,000 annual rental income, where you spend £6,000 a year on mortgage payments, repairs, and insurance. Your net rental income is £8,000.
Divide £8,000 by £200,000 to get 0.04. Multiply this by 100, and your net rental yield is 4%.
What is a good rental yield?
In the UK, the average rental yield usually sits between 5% and 8%. A gross yield of around 5% to 6% is generally considered good, while anything above 7% is very good.
The right yield for you depends on your location and property type. Ultimately, a good net rental yield must comfortably cover all your expenses while providing a solid return on investment.
What is capital growth and how is it calculated?
Capital growth, or capital appreciation, is the increase in your property value over time. You calculate it by comparing the current market value to your original purchase price.
This percentage shows your return on investment from a property value perspective. Keep in mind that you may need to pay capital gains tax when you eventually sell a profitable buy-to-let property.
Example of a capital growth calculation
If a £200,000 property increases in value to £250,000 after five years. Your property price increase is £50,000.
Divide £50,000 by £200,000 to get 0.25. Multiply this by 100, and your capital growth is 25%.
More guides for buy-to-let landlords
- How to do a landlord tax return
- How to complete an inventory and free landlord inventory template
- Landlord checklist – what to do before renting out a property
- What is landlord insurance?
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