How to Work Out Rental Yield on a Buy-to-Let Property
, by Matt Stevens
Becoming a landlord, both for the first time and as part of expanding your portfolio, means understanding how property can generate income. Specifically, there is one main source of return, and that is the rental payments received from tenants.
It’s therefore essential to know what constitutes a healthy rental yield and how to work it out. This will not only determine your investment choices, but also guarantee that your buy-to-let mortgage remains financially rewarding. In this article, we'll go over:
What is Rental Yield?
Expressed as a percentage, rental yield is a measure of how much income a property generates relative to its value. It’s calculated by comparing the annual rental income with the purchase price or current market value of the property.
For landlords and investors, rental yield helps assess whether a property is delivering a worthwhile return and how it stacks up against others. Since factors such as house prices, interest rates, and rental demand all change over time, yield can fluctuate, making it a significant figure to track before and after buying.
What is the Difference Between Gross and Net Rental Yield?
When looking at rental returns, it’s useful to distinguish between gross and net yield. Gross rental yield represents the income a property generates before taking any costs into account, and net rental yield factors in expenses such as maintenance, insurance, mortgage payments, and any associated fees.
How to Calculate Rental Yield
To calculate rental yield, start by multiplying the monthly rent by 12 to find the total annual income generated. Then, divide that figure by the property’s purchase price (or current market value) and multiply it by 100. The result is your gross rental yield as a percentage.
For a more true figure, you’ll want the net rental yield. This uses the same formula, but you deduct the extra costs before dividing by the property’s value. This gives a better indication of the actual return, although it can only be worked out if you know the specific running costs.
Example
Let’s say, for instance, that you buy a property for £150,000 which has an expected rent of £850 per month. You’d do £850 × 12 = £10,200, and then (£10,200 ÷ £150,000) × 100. In this case, the gross rental yield would be 6.8%
What is a Good Rental Yield?
As a rule of thumb, a yield above 5% is seen as healthy, and 6-7% is considered strong. However, the key is that the net yield comfortably covers all ownership costs while still leaving room for profit.
Likewise, it’s important to remember that yield is influenced by several factors, especially the location of property and its type. For example, areas such as London, where house prices are high and rental demand is strong, can produce lower yields. This is because purchase prices rise faster than rents, so the percentage return appears smaller, despite the potential for long-term capital growth being higher.
On the other hand, buying below market value can increase yield on paper, yet if rental income fails to cover ongoing expenses, returns might fall short. In particular, certain property types like short-term holiday lets can offer higher yields than standard rentals, though they usually come with greater management costs.
Costs to Consider When Calculating Net Rental Yield
When working out net rental yield, it’s integral to account for the full range of expenses linked to owning and letting a property. The standout costs include:
Deposit: Buy-to-let mortgages typically require a deposit of 25% of the market price. So, if you’re purchasing a property for £150,000, you’ll need at least £37,500 on top of the costs for arrangement fees and monthly interest repayments.
Insurance: Most lenders will want property insurance before approving a mortgage, given that it protects them against risks such as damage or loss of rental income.
Maintenance and repairs: Legally, landlords have to make sure their properties are safe and liveable. This implies repairs to fixtures, fittings, and plumbing, as well as boiler servicings.
Ground rent and service charges: If you’re investing in a leasehold property, you’ll need to pay ground rent and service charges.
Void periods: While standard buy-to-lets may only be vacant for short periods between tenancies, holiday lets and short-term rentals often face longer gaps without income.
Agent and management fees: If you use a letting agent or property management company, their fees will reduce your net return
How Do I Maximise Rental Yield?
Ultimately, getting a good rental yield requires careful planning. The first step is in choosing the right location. This means researching local rental demand, employment opportunities, and transport links, as these all play a role in how much rent you’ll be able to charge.
Next, homes which are well presented, energy-efficient, and accommodating are more likely to attract tenants. As such, things like modern furnishings or allowing pets can keep your property occupied for longer. Not to mention, you should regularly remortgage to secure a better deal and thereby protect your yield over time.
At The Mortgage Genie, our experienced brokers work with landlords of all levels, helping them calculate yields and identify the most suitable properties for their goals. If you’re interested, give us a call today at 01915809890. And why find out how much you could borrow up to today by using our buy-to-let mortgage calculator?
The above blog has information contained within which was correct at the time of publication but is subject to change.
