What is a Good Rental Yield? What Should a Landlord Know About Investments?
Have you ever asked yourself what a decent rental yield is?
You see advertisements for properties that state they will bring in X amount and you wonder if this is a good price.
It can be difficult to work out whether this is a decent yield without doing the math yourself. However, it’s important to know whether or not the figures make sense as you don’t want to end up losing money or very little in the long run.
If you are considering buying a rental property, it’s important to know what your expected annual rented income will be and how this calculation is done so you can compare between properties.
What is a Rental Yield?
The profit a property investor may expect on a property by renting it out is known as rental yield. It’s a percentage figure obtained by dividing the property’s yearly rental income by the total amount invested in it.
Net and Gross Rental Yields: What’s the Difference?
What is the distinction between net and gross rental yields, as well as how do they differ?
The gross yield is equal to everything before costs or any expenses incurred on the property. Net yield on the other hand, is after those expenses have been deducted from the property’s income.
In similar methods, both gross and net rental returns may be calculated.
Gross Yield = (rental income per week x 52) / investment capital x 100
Net Yield = (rental income per week x 52) – costs / investment capital x 100
How to work out rental yield?
To work out rental yield for a property, you have to divide the annual rental income by the purchase price of the property.
So, let’s say an investor spends £180,000 on a rental property. Depending on what state it is in, they may expect to receive £12,000 in rental income every year. This means that their rental yield is 6.25% per annum.
If you can manage to get rental yields of more than 5%, the property will be a good financial investment and you will see a return on your capital relatively quickly, which is why it’s so important for rental yields to be high when purchasing rental properties.
However, rental yield isn’t the only important factor to consider. You must also think about rental demand and rental market stability, as well as the property’s future potential value.
What affects rental yield?
There are many factors that affect rental yields such as rental market demand, economic circumstances and supply and demand of rental properties.
The rental income a property can bring in is affected by rental demand in the area. If there is a higher rental demand, rental income will be more and rental yields will increase. People are willing to pay higher rental rates when they have no other alternative as no one wants to live without the comfort of a home of their own.
If you want to purchase a rental property that has a high rental yield, it’s best to look for properties in areas where there are fewer homes on the market and more people looking for apartments to rent.
It’s also important to think about the economic state of the area you want to purchase your rental property in. If jobs are scarce, demand for rental properties will be low and this will cause rental income to drop. High unemployment will also cause a drop in rental yield.
You should also think about what type of tenant is going to rent your property. If you’re purchasing a home for a young working couple, they may not want to spend a lot of money on rent and thus expect lower rental yields than older tenants who have more disposable income or retirees who are retired and have a lower income.
The stability of the rental market is also important to consider as it will affect your rental yield. If you’re breaking into the market, there may be high supply of properties available which will cause rent to drop so you should think about purchasing an established property in an area with low supply for a decent rental yield.
Lastly, the potential resale value of a property will affect rental yields too. If you’re thinking about purchasing a property for its investment value, think about how much it could be sold for in the future and what effect this will have on your rental yield. If there is a low resale value or high chance that it won’t be sold, your rental yield may be lower than expected.
What makes a good rental yield?
The rental yield you can expect will vary depending on your location, so it varies depending on where you are looking. However, rental yields of between 5 to 8 percent are considered good rental yields, so if a rental property is yielding over this amount it may be worth investing in.
It’s critical that your rental income covers the property’s basic maintenance and upkeep costs, as well as any mortgage repayments, wear and tear, and/or tenant fees you’d have to pay out if you owned it.
It’s also important to monitor your expenditures. If you don’t, you may find yourself dipping into your contingency fund more frequently than you should.
How To Increase A Low Rental Yield?
If you have purchased a property with a low rental yield, there are some things that you can do to increase it. If the area is growing and demand for housing is increasing, this will cause rent prices to go up as well as everyone’s investment value.
You should also think about making renovations to your property to increase its marketability and appeal to tenants. You could do this by doing things like renewing the kitchen appliances, fixing up the bathroom or adding modern décor.
If you’re thinking about buying an apartment that has older tenants, you could try renovating it in order to attract new tenants.
You could also think about increasing your rental income by renting out spare rooms to additional tenants, as this can increase the number of people who want to rent from you and thus drive up demand which will increase rental yield.
However, this may not be a good idea if your tenants tend to stay long term as it will increase rental demand and thus drive up rent.
You should also think about lowering your expenses by reducing or removing fees for example, this can increase your income to put towards increasing your rental yield.
Regardless of whether you’re buying a property as a long term investment in order to make a profit in the future or simply looking for a place to live in while you can’t afford a home of your own, rental yields are always one of the main things to consider when it comes to purchasing a property.
If you’re planning on selling a property in the future or if you simply want to know what type of return on investment you’ll get from renting it out, your best bet is to find out the rental yield in your area.
Ask your real estate agent and letting agents for advice on this or research it online to see what type of properties are available and what sort of yields they offer.
What are the average rental yields in the UK?
Rental yields vary depending on where you are. Last year, the highest rental yields in the United Kingdom were discovered in Nottingham, which now has an average rental yield of up to 12 percent.
Meanwhile, it’s mainly university towns that offer the greatest return on investment.
What about London?
In London, high house costs have an impact on rental yields. There are, however, regions of the country that offer above-average returns in comparison to the UK average of 5.2 percent.
The highest rental yield is in Barking and Dagenham, at 5.3 percent. Following them are Newham and Havering, with an average yield of 4.9 percent each.
Why Rental Yield Is So Important?
When it comes to investing in rental properties, yield is one of the most important things because it determines how much you will earn from your investment and what return on investment (ROI) you can expect.
Hopefully, this article has given you some insight into rental yields and what they could mean for any property you might be interested in purchasing.