Working out the return on a potential property purchase is essential if you want to make sure you’re going to make money from your investment.
One of the ways to do this is to look at the rental yield and compare it to the yields landlords can expect on other properties around the country.
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The average yield currently stands at 4.5 per cent, according to new research by Kent Reliance.
What is rental yield?
To put it simply, rental yield means the return you make on your investment. It’s the difference between what you paid for the property and what you make back in rent.
For example, if the rent on two separate properties you own is the same, your rental yield will be higher on the one that cost the least.
How to calculate a rental yield
To calculate a rental yield, begin by subtracting the annual expenses from the annual rent.
Then divide the result by the total cost of the property.
You get the basic rental yield percentage when you multiply this number by 100.
( annual rental income / value of property ) X 100 = rental yield
Yields and higher loans
There are big regional differences in yields – something that landlords can use to their advantage.
This is because yields are not only important to work out the income that a property generates for a landlord – a decent yield can also make it easier for landlords to access larger mortgages, following strict affordability criteria introduced by the authorities.
The Prudential Regulation Authority introduced strict stress-testing to ensure that landlords could afford their loans.
By demonstrating that a higher income is achievable, landlords may be able to access higher loans.
There are regional differences when it comes to yields, as prices and rents vary around the country.
Kent Reliance said rents have outpaced house prices and risen at their fastest annual rate since 2017, up 1.3 per cent to £896 a month on average.
Given the new affordability criteria on loans, the regional differences in yields could explain why many investors are diversifying their investments, either in terms of location or property type, Kent Reliance suggested in its report.
Where are the highest rental yields?
Its research found that the highest yields are found in the North West, at an impressive 6.2 per cent. The average national yield is 4.7 per cent – here’s a breakdown of the results by region:
|Yorkshire and the Humber||5.9%|
|East of England||4.1%|
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