USING RENTAL YIELDS IN YOUR INVESTMENT STRATEGY
If you’re interested in buying an investment property or you are a first-time investor, understanding rental yields is a necessary part of your investment journey. One of the best ways to measure how suitable an investment is for you is by examining the rental yields. Rental yields are the returns you make on property investment from the monthly rent in comparison to the overall value of the property.
Without knowing about the average rental yield of your potential investment property, you’ll struggle to distinguish a good investment from a bad investment. To get the most out of your buy-to-let investment you need to know what a good rental yield is and know how to work out a property yield in the best way.
How do you calculate the yield on a rental property?
To calculate yield, you need to take the expected annual rental income for the property. Divide this figure by the total purchase price of the property. You then need to take this figure and multiply it by 100 to reveal your rental yield percentage.
Annual rental income / Value of the property x 100
£800 (monthly rental income) x 12 = £9,600 (annual rental income)
£9,600 / £274,000 (property price) = 0.035 x 100 = 3.5% (rental yield)
So, using an example, we can see a property that costs £274,000 with a monthly asking rent of £800 will offer a yield of 3.5%.
If you already own an investment property and don’t know your current yield, calculating the rental yield will be easier, as you will already know how much you generate in rental income per month and can work out an accurate yearly figure. If you want to know how to calculate the yield for a property you haven’t yet purchased, there are different things you can do. It is common practice for property investment companies state the potential rental yields of the property they’re advertising, while some will simply advertise an estimated rental value for the property. If for some reason this information is not available, the next point of call is to research average rental yields for the area that the investment property is based in.
What is a Good Rental Yield in the UK?
While you will find varying rental yields depending on the market, anything above 5 or 6 per cent is generally considered an “over- performing” and “a good rental yield” for an investment. However, the ideal yield differs between residential and student investments. A minimum of 6 per cent indicates a smart investment for residential property, whereas, for student accommodation, a rental return of 8 per cent is considered a strong rental yield. Don’t forget to bear in mind that these yields have the potential to also increase over time.
Rental yields are heavily dependent on supply and demand, as well as the quality of the location you’re investing in. Therefore, detailed preparation key. By researching the right location that shows consistent demand and an exciting pipeline of investment into the area (such as career opportunities, and regeneration) to keep that demand fulfilled, there would be less of a chance of experiencing void periods and missing out on vital rental income.
What’s the difference between gross rental yield and net rental yield?
When you work out the yield on a rental property, this is the most common type is Gross rental yield which is everything before expenses, focusing solely on the property price and rental income.
A net rental yield figure is a lot more accurate than a gross yield as it considers all the extra costs that buy to let investors may face. Factoring in everything you can, in terms of expenses, and making educated guesses about the things you can’t, will give you a much clearer sense of what the likely yield will be.
Gross yield = (weekly rental x 52) – property value x 100
Net yield = (weekly rental x 52) – costs / property value x 100
What many would call ‘ready-made’ investments are growing in popularity due to the immediacy of the returns they can provide investors. In recent years the demand for rental properties in the UK is rapidly growing and many investors are opting for pre-let residences so they can ensure immediate and hassle-free returns in the prime locations they’ve identified.