Understanding Property Yield and the Myths…

Rental yields are like the interest earnt on your savings in the bank. You save £100,000 with the bank and they offer 3% interest then you will receive £3,000 every year (less charges). Gross interest is before any fees, and net is after the fees and taxes have been deducted.

When you invest £100,000 in property and the rent is £6,000 per annum, then the yield (same as interest) is 6%, this is gross yield, and imagine you must pay £1,000 service fees, then the net yield is 5%.

Comparing your return against saving money in the bank and getting interest to property investment and collecting the rent as the income is a good way to consider if you are getting a good return on your property investment. If you are investing in property then you need to make sure that you are getting a better return, for the additional risk than simply leaving it in your bank.

Being able to work out the accurate gross and net yield is important and is an invaluable skill. Without knowing what the rental yield really is or how to calculate it accurately to understand if it is a good rental yield, investors will limit their potential returns. 

If you’re keen to get the most out of your buy to let investment and want to find out more about yield on rental property, the following information could be of use to you.

A rental yield is the percentage of return on investment that a property investor receives through rental income rather than the value it will increase, increases in the property value is the appreciation. It is the rental income, as a percentage of the total purchase price of the property.

Gross yield is the rent as a % of the investment, the net yield is essentially the money you will make from the rent, after deducting fees (service charges, agency fees, repairs, void periods). The total cost of your property includes the additional fees, and taxes such as Stamp Duty, solicitors’ fees, agency fees and so.

If you are paying cash for a unit then the yield is less important if you are expecting the property to increase in value, as the rent will easily cover the expenses whilst you sit on the property accruing its valuation.

If you are taking a mortgage then the yield is very important, as you want to make sure that the rental income will cover the finance interest, and many lenders will limit their lending depending on the anticipated rental income. It’s key to make sure the rent will cover the monthly financial fees so that you are not having to supplement the investment with your own money each month.

Leveraging property with finance is a lucrative way to grow your property portfolio and the saying “making money with other peoples’ money” is very true in Real Estate, returns can quadruple when you use finance to purchase properties rather than cash. 

If you are looking for a regular cash flow from your investments, then ensuring that you generate a high rental return is crucial if you want to maximise income.
Rental yield represents this cash flow, with the higher the percentage, the better the investment’s income generating potential.

 

What Is a Good Rental Yield?

Generally, a good rental yield is anything between 5% and 8% but they can be higher depending on the location. Rental yields can differ heavily between property type and location, with student properties typically offering the highest rental yields due to low house prices.

Choosing new builds/off-plan can be easier to predict, as they are covered by developers guarantees and will not incur ongoing repairs costs and are more desirable for tenants and have fewer void periods (periods between a tenant leaving and securing a new one). Older properties will have better headline rental yields, but these are gross rental yields, not net and the properties will require ongoing repairs and usually in less desirable areas with higher void periods and can generate less net rental income.

Cities like Manchester for example (and others like Liverpool, Leeds, Nottingham, Newcastle, and Birmingham) have higher rental yields than London due to property prices being less.
In London, the average rent is far higher than the rest of the UK, with current (Rightmove) statistics suggesting the London average rent in Q3 2022 was £2,343pcm with an average yield of 3.72% which incidentally is the highest for nearly 10 years, and this is after rents have increased by over 16% in the last year.

On the other hand, rents for example in Manchester’s centrally located Media City average £1,365 which is about £1,000 less than in London. While this seems like London is a clear choice for property investment, the higher house prices bring down the rental yield percentage. Media City in Manchester is producing a rental yield of 7.8%, whilst London is 3.72%.

 

How to Work Out Rental Yield: How Do You Calculate Yield on Rental Property?

Want to know how to work out yield on rental property? Some will say it’s very simple, but in fact many miss out the costs involved with a property purchase, but the mortgage fees, Legal fees and Stamp Duty Land tax are all part of your investment, and you will not get these refunded at any later stage. 

Here are 2 examples of a property investment plan, and the calculation of the rental yields in both scenarios. 

  1. London – Purchase property for £750,000.
    1. Costs
      1. Stamp Duty = 5%, plus 3% second Home and 2% Overseas Buyer – Total 10% = £75,000
      2. Legal Fee £1500
      3. Mortgage Fees £2,000
      4. Total Investment - £828,500
    2. Rental Income – To generate a Net rental yield of 3.72% the rental income would have to be gross £2,782pcm after considering potential void periods (in between tenants at average of 1 month per annum). If you are using an agent, then you will need to factor in their costs for management and tenant find fees.
    3. If you have mortgage at 3.5% interest  only(75% LTV) this would be £1,640.65 per month, therefore generating an income of just over £1,000 per month (less agents fees).

  2. Manchester, Media City Purchase 4 properties @£200,000 each, totalling £800,000
    1. Costs
      1. Stamp Duty = 3% second Home and 2% Overseas Buyer – Total 5% = £40,000 in total for 4 properties.
      2. Legal Fee £6,000
      3. Mortgage Fees £8,000
      4. Total Investment - £854,000
    2. Rental Income – The rent generated per month is £1,500 per apartment of £6,000 across the 4 properties. Net rental yield is 8.4% considering potential void periods (in between tenants, 1 month per annum). If you are using an agent, then you will need to factor in their costs for management and tenant find fees.
    3. If you have mortgage at 3.5% interest only (75% LTV) this would be £1,750 per month, generating an income of just over £4,250 per month (less agents fees).

*Maintenance and ongoing legal requirements such as gas checks can also be factored in so that you can accurately calculate all costs.

It is important to understand the real net yield, as when you see the headline rates from developers and agents, these can be misleading and if you are going to finance the purchase with a mortgage you need to make sure that the rent will cover all the costs, if you are not anticipating to be paying to make up the mortgage payments after you have received the rent.

 

How to Work Out Yield on Rental Property You Don’t Yet Own

So, what happens if you don’t know the property’s rental income to calculate a rental yield? Well, there are a few things you can do. Firstly, you may not have to calculate rental yields if you use the services of a property investment company, and they are providing the yields in their brochures, but it makes business sense to check out these figures for yourself.

There can be different ways in the which the yield is calculated, gross and net and it may not consider your circumstance (for example you need to use an agent to manage the property as you are overseas). Some developments may offer you an assured rent for a period, whereby they are guaranteeing the rent. Again, always check this out, because if its more than the market rent then it may leave you exposed once the assured rent period is over. Also, worth noting that a developer maybe able to offer an assured rent period if they are over valuing their properties. Again, always check this out. 

Researching average rental yield statistics (and purchase price) for the area a property is based in is a good idea. The best way is to speak to a local agent who has extensive knowledge of the area, and they will only be too pleased to speak to you as they will want your business after all, to find you a tenant and lease it, and they don’t make any money unless they do so they are likely to be up front on the market conditions. 

If you choose an independent agent, as opposed to a corporate (who are pushed for targets and business) then you will probably be in a better position to get a more realistic opinion.


What’s the Difference Between Gross Rental Yield and NET Rental Yield?   

If you want an accurate view of exactly how your investment will perform including any outgoings, then you will need to consider gross rental yield vs net rental yield. Gross rental yield is everything before expenses, while net rental yield is the rental yield figure after expenses. 
Net rental yields are often favoured as they are determining the actual income you will receive. However, gross rental yields are easier for investors to calculate themselves.


What Is a Good Rental Yield?

What Is a Good Gross Rental Yield?
Since gross rental yields don’t factor additional costs into the property yield formula, rental yields may appear to be higher than they are. For this reason, gross rental yields should be a little higher than net yields. 
This way, the net rental yield you end up with, which is the accurate rental yield percentage, won’t seem low in comparison.
Good gross rental yields can fall anywhere between 6 and 9%. 


What Is a Good Net Rental Yield?

After all additional costs have been accounted for, a good net rental yield should be between 5% to 8%.
A rental yield of this figure ensures the investor is still making a significant return on their investment, even after mortgage payments, taxes, and more.
What Is an Assured Rental Yield? 
Assured rental yields are some of the biggest perks of investing through a company and should be on every investor’s list of demands if they want to make the best returns possible.
An assured rental yield is a rental guarantee offered by the developer of your chosen investment.

Investing in a property with an assured rental yield allows you to receive a fixed return on your investment for a set period. 
After the assured rental yield period is over, you can still generate consistently high returns, provided you invest in an area with high rental costs and strong tenant demand. It is worth doing your homework to ensure that the assured rent is a market rent, so that when the assured rent period is over that you can still achieve this rent and make a good return on your investment. It is also good to check that the property is not overvalued at the start, hence the reason to offer an assured rent period.

 

What Are the Best Rental Yields in UK?

When you explore buy to let yields by postcode, you’ll find that certain UK areas can differ quite dramatically in their average property yields. 
So where can you find the best rental yields in UK?
In the UK, cities in the North currently boast some of the best buy to let yields while properties in the South offer a lower rental yield returns in comparison.

 

It is important to remember that yield is not the only factor in property investment. Appreciation is just as important, and you need to factor this into your plan. Whilst some properties can generate an income from rent, they may not appreciate in value compared to others and overall, a property with a lower yield may make more money as the appreciation, increase of its value over time can generate more profit overall.

It is important to have a balanced property investment portfolio that reflects your situation, if you want the rent to cover all the investment costs then you need to consider yield more that appreciation, but if you can cover the expenses to some degree and wait for the properties to increase in value then consider more the potential capital appreciation.

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