When investing in property the most important thing at play is your ability to calculate rental yield. Whether you are new to investing in property or a landlord with a number of properties under your belt, it doesn't matter - calculating the rental return on your properties is something that you cannot overlook.
Contents
- What Is Rental Yield?
- Why Rental Yield Matters
- Capital Growth and BMV Deals
- How To Work Out Rental Yield
- An Example Calculation
- What Is A Good Rental Yield?
- Costs Your Rental Income Needs To Cover
- What Makes A Good Buy To Let Investment?
- Price, Yield and Growth. Finding the Right Balance
- Putting It All Together
What Is Rental Yield?
Rental yield is the return a property investor is likely to achieve on a property through rent. It is a percentage figure, calculated by taking the yearly rental income of a property and dividing it by the total amount that has been invested in that property.
Why Rental Yield Matters
When it comes to investing in property, achieving a good rental return is of paramount importance.
If your income falls short of your expenditure then you lose money. If you are breaking even then you are not making any money. And, if your income doesn't leave room for contingencies then a broken boiler or a problem with a roof can put you seriously in the red.
"Long-term sustainability" should be the watchwords of any buy to let investment.
Capital Growth and BMV Deals
When investors focus too much on other factors in property (down-playing the importance of a good rental yield in their calculations), that's when they run into trouble.
Capital growth, for instance, is an important part of planning a property portfolio. Choosing the best area to invest in - one that promises a rise in house prices - will make you good money in the long run.
Similarly, being able to spot below market deals and snap up property for less than it's potential worth is worthwhile for obvious reasons.
But, if you focus on just on either capital growth or on finding BMV deals without properly considering rental yield, then you risk losing all of the gains you might have had and more.
Because, making sure that the property pays for itself month-by-month is far more important than securing a discount when you bought it, or some theoretical profit when you sell.
Read More:
How To Work Out Rental Yield
There are a number of different methods by which investors work out rental yield for an investment property. The simplest way is to take the yearly rental income and divide that by the purchase price + costs. Then you take that figure and multiply it by 100 to get a percentage.
Rental Return: An Example Calculation
So as a theoretical yield example:
If we take a buy to let property that can be rented out at £500 per month, this will give a yearly rental income of £6,000.
Let's say that the property was bought for £70,000 and needed a further £5,000 spent on refurbishments.
In this example, the calculation for rental return would look like this:
...giving the property in question a rental yield of 8%.
What Is A Good Rental Yield?
In our experience, a good rental yield for buy to let property is 8% or more. Anything under that and there might not be enough cash-flow in the property to cover running costs, mortgage payments and those unforeseen, expensive problems that sometimes crop up when you invest in property.
So when you are trying to find the best area in which to invest you need to be careful that you choose somewhere where the rental returns make sense.
Areas that have a fantastic rental demand or capital growth can be very tempting. Similarly below market value property can often look like a good deal. But, if the rental return is only, say 5%, then month-by-month your income is unlikely to even cover the mortgage payments.
Costs Your Rental Income Needs To Cover
In order to be sustainable over the long term your rental income needs to cover the running costs of the property and - I can't stress this enough - you also need a contingency budget.
You need to expect the unexpected and be prepared for your costs to increase without warning.
For instance, interest rates on mortgages are at a historical low at the moment. When the cost of lending returns to more normal levels landlords left holding property with low rental yields (under 8%) could find themselves in a lot of trouble.
And mortgage payments are only one cost in many. From your rental return, you will also need to cover management fees, buy-to-let landlord insurance and maintenance costs, all of which can fluctuate.
Costs can go down of course but you need to plan for when they inevitably go up. A house has a boiler and a roof, both of which can suddenly need replacing without warning and at significant expense.
What Makes A Good Buy To Let Investment?
Whilst a good rental return is extremely important when you are choosing a buy to let investment property there are of course other elements that you will need to balance out as an investor. In other words, although it is of paramount importance that the rental yield is high enough to cover costs, that doesn't mean that you should be aiming for the highest possible return.
For example, there are areas of Manchester where you can see rental yields of over 10% for single let properties. Does this fact make these properties fantastic investment opportunities?
Sadly, no.
These houses are £40k terraces that have little chance of growing in value and where the tenants are unreliable and difficult to deal with. Also, properties like this are difficult to sell and with any investment, an exit strategy is an essential thing to plan.
Price, Yield and Growth
The best investment properties strike a balance between a lot of different factors. As in life, the trick is to find a happy medium.
Yes, you need a property that has a rental yield of around 8%. But, you also need to have a good location, good capital growth and decent tenant demand.
There are seven essential elements to investing in property that need to be considered before you take action. These include tenant demand, capital growth, achievable discounts and your exit strategy.
For further reading, you can see our complete property investment checklist, here or this article on calculating rental yields in London.
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Any Questions?
If you have any questions or thoughts you'd like to share on how to work out rental yield for your buy to let investments then please leave them in the comments section below.
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We'd love to hear from you and as always we're happy to help.
Given the changes in lending criteria for B2L mortgages; I’d appreciate your opinion. I’m not a portfolio landlord but have a large amount of cash meaning I could buy one property outright secure net 5% rental yield with captial growth c7% annually over past 3 years.
My aim is to increase cashflow and one additional property has limited impact on this (£850/m).
Thus, I wonder if I should create an investment strategy where I put down equivalent deposit in line with 5% 145% lenders criteriato purchase a number of properties, achieving increase captiral growth return in medium term, and small increase to cash flow in short term vs. One property.
This latter, seems to make logical sense but then I get ‘the fear’ around increase risk for having small portfolio, with mortgage interest deductions reducing I’d run the management of the property lettings through my LTD company, recovering some losses to mortgage interest offset.
Of course this means more time to manage accounts and accountants costs. Cash purchase of the singular property means I’d just manage through self assessment.
My mind becomes a little jumbled and unsure whether I’m overthinking the detail of my personal time involved in management of finances around creating a small portfolio and my increased liabilities vs buying one house.
HMOs appear the best investment option but I’d need to wait for such properties to come to market and while much large rental yield and captial growth; I need to increase cashflow now and I’ve the cash just sat doing little in the bank.
Welcome and grateful for your thoughts
hi
You are basing yields on purchase price rather than current value which is a good yardstick however I try to look at both purchase price and current value.
for instance I have eight properties producing a yield of 9% based on purchase price but if I base it on current price the yield drops to 5%. That said the gain on the properties is 57% over the period of ownership or about 9% per annum (some were in a state and have been refurbed producing big gains in the first year of ownership) So a total yield of about 18%
Do you consider that to be a reasonable way to look at things ?
I am now considering selling off as I do not believe a 5% return based on current values to be sustainable long term compared to stock market investments. Non of the properties are mortgaged. What are your thoughts ?
Hi Bob, for ease of calculation and apples to apples type comparisons we do try and look at original purchase prices, but for sure when we do annual checks of our portfolio we do look at current yield based on assumed today market values. However we don’t necessarily (personally anyway) make decisions to sell when ‘current’ yields drop. That may be caused by a recent price increase for the area where rents haven’t yet increased or increased inline, and it could be a fantastic location so selling just to balance out the yield may achieve a negative end result for us.
It would also miss the capital appreciation element, the assumption maybe if your current yields have dropped and it’s a good area where rents haven’t decreased £ for £ each month, then it’s likely caused by a price value increase of the property. So your true total return would also need to take that in to account. That combination maybe more favourable as a metric to consider and a judgement made on if you think that is set to continue with like for like growth or values levelling and yields catching up.
We wouldn’t bank on capital growth but we would soft calculate in to any value assessments we’re considering
Good afternoon brother!
I’m interested to investment in student apartment in Liverpool
Near Hamilton Square coast around £55000 I bought in cash not mortange return ( yields ) 8% per years !
It’s good to investment Tragent 5 years
And how much Is can going to crow in 5 years u research
Pls I need u idea I
Thanks
Hi Dr Hamed,
There’s no way to accurately predict growth for any given location or timeframe, you can look at fundamentals like previous and recent property sold prices, marketing prices, speed of sales, which we cover in locations like Birmingham, Stoke and Liverpool is coming soon in buy to let hotspot series
https://www.propertyinvestmentsuk.co.uk/invest-in-stoke-on-trent/
We also have a property club where you can access off market property opportunities that have been shortlisted by property agents that maybe a fit for you,
You can join here – https://www.propertyinvestmentsuk.co.uk/investment-property/
Hope that helps
Looking to purchase 2bd House with yard 42500 rent 450 pcm will cost 3000 for the damp course then decorating plus furniture as you buy furniture once do I count it in the yield approx 2000 for furniture then carpet tho very small terraced house thanks
Di
Would you say 8 % is still the benchmark with all the changes that have accrued i.e Stamp Duty . i am currently looking at a property at 187 k add costs we will end up near 200k, the guaranteed rent is 11.5k . Whats your thoughts
Regards David Dimarco
Hi David,
8% is the target we try and aim for across our portfolio. We have some high yielding properties (HMOs and lower priced Buy to let) and also some higher priced lower yielding buy to let but that are in great locations for possible future growth so the balance delivers over 8%. Higher value properties will naturally have a lower yield as rent increases don’t grow inline and aren’t at parity at the same rate as total house price values, so a £1000pcm rent on a £200k property will generally be very good for most areas
Would a buy to let purpose built student property (flat) in central Cambridge costing £220,000 (cash) yielding £10,800 pa. rent (net) which is also let on contract for the next 4 years and enjoys a yearly rental increase be a good investment? (It is only 8 years old and has 117 years left on lease).
Hi Ron,
There’s so many variables to say it would be a good investment and what’s right for your circumstances may not be a fit for someone else’s,
If the location works for you and the yield achieves your own personal targets then it could be right for you
The yield is 4.9% Net which is lower than we aim for , but as mentioned if it achieves your aims and the location, property type and tenant type is a fit for you