How To Work Out Rental Yield For A Buy To Let Investment

the perfect rental yield

When investing in property the singularly most important factor, that will make or break your business, is your ability to calculate rental yield. Whether you are new to investing in property and looking at your first house, a landlord with a number of properties under your belt already… or even a manager of a large portfolio – it doesn’t matter – calculating the rental return of your properties is something that you cannot overlook.


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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.



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:

£6,000 ÷ (£70,000 + £5,000) x 100 = 8

…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.

xFor 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

price, rental yield and growth. finding the right balance

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.

You can see our complete property investment checklist here.

Putting It All Together

So for the question what rental yield is acceptable or what is a good rental return on property our answer is that it is best only to consider investing in buy to let property that has a minimum of 8% rental yield.

If your returns are at this level then the costs involved in running a property are covered and a reasonable profit can still be achieved.

If you can find a property that can achieve a rental return that’s higher than 8% then that’s great but you need to make sure that you are happy with the tenant profile, the level of growth in the area and that you have an exit strategy in place in the event that things go sour.

To go lower than 8% on your yield is risky. Lower than 8% means cutting it very close when it comes to covering your month-by-month expenditure and leaves no wriggle-room when your costs inevitably increase. This is especially true if you are using finance to fund your investment.

Join Our FREE Training

Thank you for reading this article. If you liked this content then why not join our free online property training course?

In there we cover a range of different property strategies to help you get started on building a long-term property portfolio or creating a cash flowing property business.

We also look at ways to increase your return on investment with any of the properties you may be considering and we also have a couple of cheat sheets and downloadable documents.

Just click the image below to join our free training course today.

Any Questions?

If you have any questions or thoughts you’d like to share about how to work out rental yield for your buy to let investments then please leave them in the comments section below.

Alternatively, you can get in touch via our Facebook page.

We’d love to hear from you and as always we’re happy to help.

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2 Responses to “How To Work Out Rental Yield For A Buy To Let Investment”

  1. Ron Jackson says:

    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).

    • Robert Jones says:

      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

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