Rental yield is one of the most important considerations for any new or existing buy-to-let landlord.
It helps you understand whether a property is a good investment, and whether you’ll be able to cover the cost of your buy-to-let mortgage.
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But what exactly is rental yield and how do you work it out? We've put together a quick guide and free calculator to help you work it out.
Rental yield describes your annual rental income, as a percentage of the total value of the property.
Rental yield is a useful way for buy-to-let investors and other landlords to determine whether or not their property is a good investment, and it’s also often used when calculating how affordable the buy-to-let mortgage would be.
However, it’s important to remember that rental yield is not the only factor when deciding whether it's a good idea to invest in a particular property.
You might also look at capital appreciation – that is, the potential increase in value of the property in the long term. The housing market has been booming since the temporary introduction of the stamp duty holiday – we’ve seen an annual price rise of 10.2 per cent according to Land Registry data in March – but with uncertainty over how long this rise will continue, many landlords are focusing on steady rental yield rather than dramatic capital appreciation.
It’s easy to calculate 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’s important to note that this is known as the ‘gross yield’. You can also work out the ‘net yield’, which is the figure you get when you take all your costs like insurance and maintenance into account.
It gets more complicated when you’re trying to estimate the yield for a property that you haven’t yet bought, or for one where you still need to secure tenants. In these cases, you need to think about what might constitute a realistic rent.
Research average rents in the area, and consider factors like proximity to transport links, local amenities, and schools. If you’re looking into properties in the UK capital, our guide to rent prices in London might be a good starting point.
So what is a good yield on a rental property? Earlier this year, Simply Business reported on Aldermore Bank’s City Tracker. Cities in the UK were ranked against five key indicators, with Manchester coming out top. However, when taking into account rental yields only, Hull was leading the way, followed by Glasgow, Stoke, and Wigan.
Aldermore’s ranking goes beyond rental yield, and the complete list takes into account other factors, including average total rent, long-term return through house price growth, number of vacancies, and percentage of the city population that rent. You can read the full breakdown in our best buy-to-let areas in the UK guide for 2021.
Is there anything else you want to know about how to work out yield? Let us know in the comments.
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