Successful buy-to-let investors know how to calculate rental yield. Anticipating costs and predicting returns is essential when evaluating investment opportunities. Understanding how to calculate the yield on rental property investments empowers prospective buyers to compare deals and make informed decisions. In this blog, we will delve into the step-by-step process that investors can follow to compute net rental yields and make sound real estate investment choices in the UK. Let’s get started!
What Is Rental Yield?
The income earned from having rental property investments in their portfolio is known as rental yield. Additionally, rental yield can be either gross or net, like any other income.
A buy-to-rent property is associated with gross rental yield, where the relevant or miscellaneous costs and expenses have not been taken into account by the investor. Furthermore, considering these factors is important for a comprehensive understanding of the investment.
Gross Rental Yield = Annual Rental Income / property price
Gross rental yield does not provide a reliable rental income percentage. However, the need for net rental yield arises. In contrast, we calculate net rental yield by subtracting all costs incurred on the property during the year from the annual rental income, and then dividing the result by the property price or value. Mathematically, we can express this as follows:
Net Rental Yield = (Annual Rental Income – All Cost Incurred) / Property Price or value
The costs/expenses include:
- property tax,
- maintenance cost,
- insurance,
- depreciation,
- Legal fees,
- Agent fees etc.
How To Calculate Rental Yield
Two examples that explain how to calculate rental yield are given hereafter. Property bought with a mortgage has higher rental yields than those bought without a mortgage. This is because it is computed based on investors’ funds in the project. Please go through the examples for clarity.
Example:
Assuming you want to buy a property worth £250,000 in Manchester,
Mortgage = £150,000.
Amount invested = £100,000
Annual expense incurred is = £2,500
Mortgage repayment = £1,500
Annual rent = £10,000.
Step 1: How To Calculate Rental Yield With Mortgage?
Ignore debt (i.e. mortgage) in your computation of rental yield. Use only the personal cash you invested in the property to divide the annual profit. That is:
Net Rental Yield = (Annual Rental Income – All Cost Incurred) / Personal Cash Invested
Looking at the above example, the Net Rental Yield with Mortgage =
Net Rental Yield = (£10,000 – £4,000) / £100,000
= 0.06
Step 2: How To Calculate Rental Yield Without Mortgage?
If you didn’t buy the property with a mortgage, divide the annual profit with the property price. That is:
Net Rental Yield = (Annual Rental Income – All Cost Incurred) / Property Price or value
Net Rental Yield = (£10,000 – £2,500) / £250,000
= 0.03
Obviously, it is more profitable to buy a property with a mortgage.
How To Calculate Rental Yield Percentage?
Rental yield is worked out in percentages by simply multiplying the rental yield figure by 100.
Example:
Step 1 Rental yield in Percentage = 0.06 x 100 = 6%
Step 2 Rental Yield in Percentage = 0.03 x 100 = 3%
What Is A Good Rental Yield?
All positive rental yields are good. However, the best option is to aim for the optimum rental yield. This refers to the highest alternative rental yield among all the affordable properties you have analysed. Therefore, there is absolutely no reason to consider rental yields from properties that are beyond your budget. Doing so would be a waste of your precious time.
Now that you know how to calculate rental yield, you might still have some confusion about the exact costs to deduct during the working out.
Rothmore Property is dedicated to assisting you in this complex process. Our team of experienced professionals can provide guidance on property selection, budgeting, and yield calculations. We’ll help you identify affordable properties that offer optimum rental yields, saving you valuable time and helping you make the most informed investment decisions. Trust Rothmore Property to simplify and streamline your property investment journey.
References
Landlord Vision (n.d.). Rental yield calculator. https://www.landlordvision.co.uk/rental-yield-calculator.html
OpenRent (2022, August 21). What Is a Good Return on Investment (ROI) for a Buy-to-Let Property in the UK? https://blog.openrent.co.uk/calculate-buy-to-let-roi/
Salboy, (2022, August 1). How to work out rental yields and ROI. https://salboy.co.uk/2020/08/how-to-work-out-rental-yields-and-roi/
Westpac (n.d.). How to calculate rental yield. https://www.westpac.com.au/personal-banking/home-loans/investing-in-property/rental-yield/
