Calculating Rental Yield for a Buy-to-Let Property
Calculating Rental Yield for a Buy-to-Let Property – by Sim Sekhon.
Rental yield is a valuable metric. It can help you determine whether a buy-to-let property is a good investment and can also be used to compare the returns of different properties. But how is it calculated, and what represents a ‘good’ yield?
I’m often asked those two questions. The first – how is it calculated? – is easy to answer. Let’s start with that.
Rental yield is the annual rental income generated by a property, expressed as a percentage of the property’s value.
Step 1: Calculate the Annual Rental Income
This is simply the amount of rent you expect to receive over twelve months. Simply multiply the monthly rent by 12. If the monthly rent is £1,000 then the annual rental income would be £12,000.
Step 2: Determine the Property Value
This can be a little more complex. Often people use the purchase price of the property. Alternatively, you could use the current market value. You could get a valuation or use an estimate. Check Rightmove or Zoopla to see if there are recent sales of similar properties in the same area.
Step 3: Calculate the Gross Yield
To calculate gross yield, divide the annual rental income by the property value and multiply the result by 100.
For example, if the annual rental income is £12,000 and the property value is £200,000, the gross yield would be:
(£12,000 ÷ £200,000) x 100 = 6%
Step 4: Adjust for Expenses
Gross yield allows you to compare the returns of different properties but doesn’t consider the expenses associated with owning and managing the property.
For a more accurate picture of the investment opportunity, you’ll need to adjust the rental yield for expenses such as property management fees, maintenance, repairs, insurance and taxes.
To calculate net yield, subtract the total expenses from the annual rental income and divide the result by the property value. For example, if the total expenses are £3,000 per year, the net rental income would be:
£12,000 – £3,000 = £9,000
And the net yield would be:
(£9,000 ÷ £200,000) x 100 = 4.5%
A great indicator but only part of the picture
Although you may have to estimate some of the numbers, I consider these calculations essential. They’re an easy way of comparing different investment opportunities. But don’t look at rental yield – gross or net – in isolation. Other factors such as location, market trends, and potential for capital appreciation should be considered.
What’s a great net yield?
This is the second question, and it’s more difficult to answer.
Generally, a good net yield for a buy-to-let property in the UK is in the 4 to 6% range, but it does vary. And while net yield is useful, investors should also consider the potential for capital growth, location, property type, tenant demand, and the overall health of the property market in the area.
The investor’s personal circumstances and financial goals can also sway a decision. Some may be happy with lower yields if there’s good potential for long-term capital growth. Others, wanting a steady stream of rental income, may prioritise a higher yield.
Rental yield is very useful, and hopefully, I’ve shown that it’s very simple to calculate but it’s only one of the things you need to consider in your investment decision.
