It helps you determine whether a property is a good investment, and is also used to determine the affordability of buy-to-let mortgages.
But what exactly is rental yield and how do you know what yours will be? We’ve put together a quick guide to help you work it out.
Rental yield describes your annual rental income, as a percentage of the total value of the property.
Rental yield is a key means by which buy-to-let investors and other landlords can determine whether or not their property is a good investment, and it’s also often used when calculating the affordability of a buy-to-let mortgage.
However, it’s important to remember that rental yield is not the only factor that might determine whether or not it’s a good idea to invest in a specific property.
You might also look at capital appreciation – that is, the potential increase in value of the property itself. This has been an overwhelming consideration for many landlords in the last couple of decades (as well as owner-occupiers), but as the housing market begins to slow, and with deep economic uncertainty on the horizon, many landlords are now looking for a slow and steady rental yield rather than dramatic capital appreciation.
It’s easy to calculate the rental yield on an individual property. First, find your annual rental income for that property. Then, divide this by the property value. Finally, multiply the figure by 100 to get the percentage.
So, if your annual rental income was £12,000, and the property was valued at £200,000, your rental yield would be six per cent.
It gets more complicated when you’re trying to estimate the yield for a property that you haven’t yet bought, or for which you are yet to secure tenants. In these cases, you need to think about what might constitute a realistic rent. Do some research about average rents in the area, and consider factors like proximity to transport links, local amenities, and schools.