How to calculate rental yield
How to calculate rental yield
Some of the world’s greatest minds hated maths — from naturalist, Charles Darwin, to Thomas Edison, inventor of the light bulb. So if the thought of calculating anything brings you out in a cold sweat, don’t worry, you’re in good company.
The method to calculate yield on a rental property is actually pretty straightforward. It’s just a matter of putting together a few numbers to work out whether a property is a good investment or not. You don’t need a special property yield calculator or hours to spare — stick with us and you’ll be an expert in no time.
What is rental yield?
Before we go over how to work out yield on a rental property, let’s just run through the basics first. What is rental yield and why does it matter? Well, rental yield is the return you can expect to make on the property you own or are thinking of purchasing. The definition of yield is to “produce or provide”, so rental yield is just how much rent that property is going to provide you, as the new landlord.
It’s important because it’ll tell you how much money you stand to make from this investment — plus, it can also determine the kind of mortgage you’re able to get from a lender. To learn more about how mortgages work, check out our: ‘First time buyer mortgage guide’.
How to work out rental yield
Now let’s get down to it. To work out property yield, you’ll need two numbers:
- The property value
- Your annual rental income amount
The property value can either be the purchase price of the property or its current market value. To get your annual rental income amount, just take your weekly rent figure and times that by 52 weeks. Or if you charge monthly, take your monthly rent figure and times that by 12 months.
If you charge £250 a week — 250 x 52 = £13,000 annual rental income
If you charge £1,000 a month — 1000 x 12 = £12,000 annual rental income
Now you’ve got both numbers, you simply need to divide your annual rental income amount by the property value. So if your annual rental income is £12,000 and you bought your property for £200,000, your sum would look like this:
12,000 ÷ 200,000 = 0.06
Final step, multiply your result by 100 — so, 0.06 x 100 = 6% yield
And that’s how to work out percentage yield. Easy, right? And if you can’t manage the sums in your head, you can always whip out your phone calculator.
What is the difference between gross and net yield?
So now you know how to calculate rental yield like a pro, it’s worth knowing the difference between gross yield and net yield. Essentially, that 6% we arrived at through the method above represents your gross rental yield. It might sound pretty good — £12,000 a year in rent would mean that in roughly 17 years you’d have made back the £200,000 you spent on the property. But gross rental yield doesn’t take into account any of the costs associated with being a landlord and owning a property.
Those costs might include:
- Repaying a mortgage or house loan
- Empty periods where no one is paying rent
- Insurance premiums
- Routine maintenance to keep the house safe/functional
- Repairs and replacements between tenancies
After you subtract all of these bits from your gross rental yield, you’re left with your net rental yield — essentially, how much profit you’re actually going to make.
Unfortunately, being a landlord isn’t as straightforward as buying a house and finding a tenant to pay you rent. You’ll likely need to make regular mortgage repayments, insurance payments, bills for keeping the gas, electric, and water functioning — and that’s not to mention the tricky business of managing tenants. Your property could sit empty for months while you advertise, and once someone moves in, you’ll inevitably have to make repairs and replacements to the furniture and fixtures along the way.
Luckily, some damages will be covered by your tenant’s deposit, but you can learn more about that in: ‘What can a landlord deduct from your deposit UK’.
What is a good rental yield UK
As a rule of thumb, a larger yield means you’re seeing a larger return from your property investment each year. There’s no single answer as to what is a good rental yield on rental property in the UK, but most property investors look for something between 5-8%. At the end of the day, you need enough funds to cover your running costs, including emergency savings for frozen pipes or a collapsed roof, for example, plus a little extra profit to make it worthwhile.
To check whether your home insurance covers acts of nature, read: ‘Home insurance and storm and weather damage’.
Does rental yield vary by region?
Yes. The final piece of the puzzle is where in the UK your property is based. Regions with sky-high property prices, like London for example, tend to produce lower average yields. That’s because there’s only so much you can charge in rent and so it’ll take much longer to see a significant return on your investment.
Here’s a quick overview of some 2021 rental yields in the UK from Seven Capital.
A few final tips…
It’s easy to feel overwhelmed when you first start on the property market — so many different new terms and processes to learn. The good news is, most of it’s simple enough and if a quick google search doesn’t help, don’t be afraid to ask your estate agent to explain the next time they take you for a viewing.
Considering renting out your home? Why not read: ‘Can I rent out my house’.
Still looking for a bargain? Check out: ‘How to negotiate house price discounts’.