All successful buy-to-let investors know how to calculate rental yield. It, thus, makes sense for investors to anticipate the cost and predict the returns while considering an opportunity.
Knowing how yield is calculated on rental property enables prospective buyers to compare different deals in order to settle for the best.
Let’s quickly dive into the steps investors can take to compute the net rental yields while making their real estate investment decision in the UK.
What Is Rental Yield?
Rental yield is the income investors earn for having a rental property in their portfolio. Like every other income, rental yield could be gross or net.
A gross rental yield is an annual income on a buy-to-rent property where the investor failed to factor in the relevant or miscellaneous costs and expenses.
Gross Rental Yield = Annual Rental Income / property price
Gross rental yield is not a reliable rental income percentage. Thus, the need for net rental yield.
Net rental yield, on the other hand, is the annual rental income minus all costs incurred on the property during the year divided by the property price or value. This is mathematically written below:
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. But the best is the optimum rental yield. It is the highest alternative rental yield of all affordable properties you analysed. There is absolutely no reason to consider rental yields from the property you can’t afford. It’s a waste of your precious time.
Now you know how to calculate rental yield, but you might be confused about the exact costs to deduct while computing it. We can help with further clarity if you don’t mind.
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/
