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Latest News How to work out rental yield 
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How to work out rental yield 

Rental yield

Knowing how to calculate rental yield is an important part of the landlord’s toolkit.  It’s essential to know how to recognise a good rental yield, why it matters, and how to maximise it.

Our step-by-step guide helps landlords understand the difference between gross and net rental yields, and quickly work out the yield for an individual property or for an entire property portfolio.

Rental yield calculator 

Use our rental yield calculator to quickly find out your rental yield.

You can input the figures for a single property or, if you own multiple properties, add up the figures and input the totals to get a yield for your whole portfolio.

Rent yield

What is rental yield? 

Rental yield is a way of working out the potential returns on property investment from rental income.  Put simply, it’s the annual rent you expect to receive expressed as a percentage of the property value.

Why is rental yield important? 

Rental yield calculations give landlords and property investors a means of measuring the value of their investments, which can change depending on fluctuating house prices, mortgage interest rates and demand for rental properties.

Before purchasing a buy-to-let property, it’s important to know what rent you will need to charge to produce a good annual yield. In short, is your buy-to-let investment going to be worth it?

It’s also important to consider other factors when assessing potential return on investment. It’s best to buy in areas where demand for rental properties is strong, or where house price growth is high.

Ultimately, you need to make sure the net rental yield – after mortgage payments and other expenses are accounted for – is high enough to make a profit and ride out any unforeseen repairs or short vacant periods, whilst the increasing property value will help to ensure you make a return on your investment in the long-term.

What is a good gross rental yield? 

So, what is a good yield for rental property?  Landlords should aim for between 5-8% as a good gross rental yield.  This should cover your expenditure, while allowing you to make a reasonable return on your investment without having to dip into your contingency fund too often.

What is the average rental yield in the UK? 

The average rental yield across the UK is in the region of 3.5%, but varies widely depending on the location of the property. London has some of the lowest rental yields because, although monthly rental costs are high, property prices are the highest in the UK. However, investing in London property can also give bigger returns long-term as property prices increase at a faster rate.

Some of the best rental yields are in the North West and North East, where rental demand is strong but property prices remain comparatively low, and in university towns and cities where demand for rental properties is always strong.

How to work out rental yield 

First, you need to understand the difference between gross and net yield.

What is gross rental yield? 

Gross rental yield does not take into account any expenses you spend on the property.

It is calculated using only the value of the property and the rental income received and is a quick way of comparing different investment possibilities. It is also often used by mortgage lenders when assessing the affordability of a buy-to-let mortgage.

What is net rental yield? 

Net rental yield also takes into account expenses like mortgage payments, landlord insurance, and maintenance. It is a more accurate assessment of the real-world rental yield.

How to calculate rental yield 

Calculating the gross rental yield uses a straightforward formula: 

Annual rental income ÷ property’s purchase price or value x 100 = gross rental yield

Follow these steps or use the form at the top of the page:

  1. Multiply your monthly rental income by 12 to give your annual rental income.
  2. Divide that figure by the property’s purchase price or value.
  3. Multiply this figure by 100 to get your gross rental income yield percentage.

Example of a gross rental yield calculation:

Sarah bought a property for £140,000 and rents it out for £750 a month.

Her annual rental income is £750 x 12 = £9,000.

Annual rental income of £9,000 divided by the purchase price of £140,000 = 0.064.

Multiply this figure by 100 = 6.4% gross rental yield.

Calculating the net rental yield uses a slightly different formula:

(Annual rental income – expenses) ÷ property value or purchase price x 100 = net rental yield

Follow these steps to work out your net rental yield:

  1. Multiply your monthly rental income by 12 to give your annual rental income.
  2. Subtract your annual expenses from this figure.
  3. Divide the resulting figure by the property’s purchase price or value.
  4. Multiply this figure by 100 to get your net rental income yield percentage.

Example of a net rental yield calculation:

Sarah bought a property for £140,000 and rents it out for £750 a month.

She has a buy-to-let mortgage of £80,000, costing £230 a month (£2,760 a year), and has other annual expenses of £1,000 (maintenance, insurance, management fees), totalling £3,760.

Her annual rental income is £750 x 12 = £9,000

Annual rental income of £9,000 minus annual expenses of £3,760 = £5,240

Divide this by the purchase price of £140,000 = 0.0374

Multiply this figure by 100 = 3.74% net rental yield.

How to maximise your rental yield 

As we’ve discussed, there are various factors that will affect your rental yield.

But there are some things you can do to maximise your rental yield.

  1. Consider a student let or house in multiple occupation (HMO). You can often earn more rent by letting your property to multiple people. However, there is a lot to consider when deciding to rent a property as an HMO.
  2. Consider short stay rental. Rental yield can be increased by letting your property as a short stay rental instead, for example as a holiday let, Airbnb or under a tenancy agreement less than 6 months. However, you will need to factor in the extra work that this could mean for you through management, administration, and maintenance.
  3. Keep control of your outgoings. Reducing your expenses will increase your net rental yield. Are you on the best possible mortgage rate? Are you paying over the odds for tradespeople? Have you got the best landlord insurance deal for you?
  4. Alter the rent. If you are struggling to rent out a vacant property, do some research on the average rent for similar properties in your area and you could reduce the rent if you find you’re not competitive.

Get the right landlord insurance 

Whether you own one or multiple rental properties, it’s vital you get the right landlord insurance to cover you for everything from buildings to unpaid rent and legal wrangles.

Alan Boswell Group provides award-winning landlord insurance, from single properties to larger portfolios, plus a wealth of helpful advice and information on our landlord hub.