When embarking on a Buy-to-Let investment, rental yield is one of the most important considerations for landlords to assess whether the property is a good investment.
Here we explain how to calculate rental yield and why the sums matter.
What is Rental Yield?
Rental yield is the amount of rent you can expect to achieve from your property in a year as a percentage of the total value of the property.
Calculating Rental Yield
The rental yield of a property is calculated by dividing its annual rental income by the total property value and then multiplying this by 100.
For example, if you purchase a Buy-to-Let property for £600,000 and rent it for £2,000 per month, your rental yield is four per cent.
You can use the predicted rental figure if you are buying a property off-plan.
This calculation will determine the gross rental yield, which is useful when comparing the relative returns of various investments; however, it doesn’t consider the associated costs and fees that come with owning a property.
Gross Rental Yield vs Net Rental Yield
While gross rental yield calculates the yield of your investment before expenses, net rental yield calculates everything after expenses. As such, net rental yield can offer a more comprehensive understanding of investment returns because it also considers the costs associated with owning a property, including maintenance, insurance, and taxes.
The net rental yield of a property is calculated by dividing its annual rental income (minus the associated costs), then dividing it by the total property value and multiplying this by 100.
It is helpful to use a rental yield calculator.
What is a Good Rental Yield?
A good rental yield should cover all projected expenses associated with the property while allowing Buy-to-Let investors to make a reasonable return on their investment.
Rental yields vary between UK regions, with certain parts of the country outperforming others.
When considering a Buy-to-Let as a medium to long-term investment, it is also essential to consider capital growth and tenant demand.
For more information, read our Buy-to-Let guide here.
