Whether you are investing in property for the capital growth or the rental income, it is essential that you understand how rental yield works. Your yield needs to cover your running costs, your mortgage, maintenance, management, voids and insurance. If you fail to crunch the numbers, then you will go broke, quickly.
It’s calculated by dividing the total investment of the property, by the total gross yearly income from rental.
Let’s consider an example….
Cost of the property: £200,000.
Rental income: £1000 per month, £12,000 per year.
This would give you a rental yield of 6%.
Which, at a time when interest rates are close to zero, sounds quite good… but is it really that good when interest rates change? or if you get a rough run of maintenance costs?
Factoring In Other Costs
To calculate your real income, you need to remember the property is unlikely to be occupied all the time.
There’s going to be dead time between tenants, where the property is providing zero income.
On top of this, there’ll be the costs of insurance, repairs, management – and, in the case of multi-lets, utilities.
For single lets, I tend to assume (as a rule of thumb) costs equal to around 2-3 months rent per year to come of your gross rental returns.
For multi-lets, I use 4-6 months rent. This may sound high, but in the typically HMO there are a lot of costs to consider.
(check out this casestudy I did here on HMO’s and which strategy gives the best returns.)
So, using our 6% gross yield, the example above:
A single let would have a real net yield of 4.5-5%.
Still, more than you’d get from the bank but, once you subtract your mortgage costs, you might be losing money, rather than making it!
That is why it’s critical to calculate the Rental Yield of every investment property you look at.
What You Should Aim For
Personally, I only look for properties for investment purposes where there are gross yields of 8%+ Rental Yield’s for single lets and 12%+ Rental Yields for multi-let properties.
By following this rule of thumb, we ensure we have enough rental income to cover the day-to-day running costs and finance costs of the property, and that means every investment is adding to our cash flow, rather than reducing it.