Are you a landlord already, or thinking of venturing into the world of property letting? There's plenty of things to organise and decide, such as the location of the property and then which you choose to buy, if you're managing the property yourself or paying a letting agents to do it for you, and the kind of tenants you're looking for. One of the most important things to consider, however, is rental yield. You need to ensure you're making money on your property, as this is likely why you're doing it in the first place!
What is rental yield?
Before we dive into how to calculate rental yield, first off you'll want to know what it is. In short, rental yield is the return that a landlord receives from a rental property. It's a percentage that is calculated on annual rental income, and takes into account yearly expenses on the property.
Why is rental yield important?
As we've already touched on, rental yield is one of the most important things to consider when calculating how much you're going to ask for in rent on your property. If your costs total more than your income, you'll be losing money. Plus, you don't want to be breaking even, you want to be making a healthy profit for it to be worthwhile. Being a landlord can be stressful at times!
Also, bear in mind any unexpected costs on top of the regular, such as a broken boiler or a leaking toilet. If your profits are just teetering above the costs, this could tip you over.
How to calculate rental yield
When calculating rental yield on a property, you'll need to remember to subtract anything that you spend on the property and maintenance on an annual basis.
Here's how to calculate rental yield:
It will be more difficult to use this calculation on a property you don't yet own or have tenants in. This is because you may not know how much rent you'll charge or how much you'll be spending on the property in terms of maintenance etc. You can always use estimated figures but of course estimated figures going into the calculation results in an estimated answer.
If you charge £500 per month to rent out your property, it totals £6,000 for a year. Let's say you purchased the property for £100,000, and put aside £5,000 for expenses. Your calculation would like this:
This would give you a rental yield of 5.7%.
What rental yield should you aim for?
This is difficult to say as house and rental prices vary from location to location. If we look at the top cities in the UK ranked on rental yields, the top 10 average 5.72%. This would therefore be considered as a good yield. A rental yield of 7% or higher is generally considered very good.
We've already covered the upcoming areas for buy-to-let in 2020, take a look!