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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.
But what exactly is rental yield and how is it calcualted? We've put together a quick guide and free buy-to-let yield 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.
You can use an easy yield calculation formula to work out the return 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. As a starting point, you could use a rental income calculator to get an idea of a property’s rental value.
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? Data from Zoopla shows that Scotland is home to six of the top ten areas with the highest average rental yield.
The areas with the best yield have very low average purchase prices (under £100,000) but still generate a healthy average monthly rent (over £480), meaning a higher return for landlords.
Gross rental yield
If you're looking for a ranking that goes beyond rental yield, and takes into account other factors, including long-term return through house price growth, number of vacancies, and percentage of the area population that rent, you can read our best buy-to-let areas in the UK guide.
Is there anything else you want to know about how to work out yield? Let us know in the comments.
Simply Business Editorial Team
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
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