# How to work out yield on rental property

## How to calculate property yields and return on investment

Knowing exactly how much profit a commercial property will bring you is a vital component of the buying decision. We look at how you can calculate the yield and return on investment (ROI) so you can make an informed choice.

What is rental yield?

There are two forms of rental yield: gross yield which omits costs and expenses, and net yield which omits figures such as interest rates, maintenance costs and periods when your property may be vacant.

Rental yield is a method of calculating the ROI on your commercial property using how much rental income the property is likely to bring, over the true cost of purchasing the property. If you’re considering a Buy-to-Let property the yield means how much annual income it will generate as a percentage of the value of the property.

By using rental yield as a yardstick you can compare different properties before you buy in order to compare how much return you’re likely to make.

Making a calculation

Calculating the gross yield: the gross yield simply means how much ROI you will make before any expenses are deducted. It’s calculated by this simple formula:

Annual rent ÷ property value x 100

So, if the annual rent you expect to make on a property is

12 x £892 pcm (the UK average as of January 2017) = £10,704

And that figure is then divided by £216,750 (the average cost of a house in the UK as of September 2016) x 100 the gross yield will be 4.9%.

Calculating the net yield: the net yield will give you a figure for the ROI after you have deducted your expenses. You can calculate it like this:

Annual rent (using the same figures as above) = £10,704 – operational costs (purchase price, transaction costs, letting fees, maintenance and repair costs, mortgage interest and insurance etc) = £8,359 (average as of April 2015) ÷ property value (£216,750) x 100, the net yield will be 1%.

Clearly, the higher the percentage, the better, and please bear in mind that these calculations are based on the UK average – in your specific location and in your own individual circumstances, the figures will inevitably work out differently. Experts suggest that any figure above 7% (net yield) is a healthy ROI.

If you need advice on any aspect of purchasing a commercial property or are concerned that your current property is not delivering on its ROI potential talk to a member of our team. We can offer professional, current advice on getting better value from your mortgage as well as rental management services among other things.

Calculate your rental yield on your UK buy to let
property investment.

Instantly calculate your
rental yield:

What is a UK property
rental yield?

Rental yield is the amount of money an investor will make on their buy to let property by calculating the gap between the asset’s overall costs and the rental income generated on the property.

Investors must understand the real return on investment when building their property portfolio to ensure that there are no hidden expenses.

According to the yourMoney website, the average UK rental yield is 3.53%. With that data in mind, investors should consider opportunities that can generate a slightly higher return – we suggest anything between 5% and 8% is a good rental yield on property investment.

Rental returns that exceed this level should be carefully considered and researched as they may be too good to be true.

Northern Powerhouse cities including Manchester, Liverpool, Newcastle, and Leeds offer some of the best rental returns for buy to let investors. A lower entry level coupled with a high demand makes these cities hotspots for property investment.

London has always been a popular choice for investors however, with property prices and rental yields stagnating in recent years, investors should consider commuter belt locations that offer easy access to capital including Brentwood and Chatham.

You could be generating a higher yield from your property.

#### Looking for high yields on your next rental property? You’re in the right place.

How do you pick an investment area? Our advice would be to target places with a strong yield and near-term growth, whilst avoiding locations that have already peaked or are showing no indications of price increases.

We understand that capital growth is a good factor when thinking about where to invest – but you don’t want to just hang your hopes on that. Wouldn’t it be great if you were bringing in a healthy monthly yield too?

Strong, reliable rental income is absolutely essential. You need it to cover your expenses, and a healthy surplus can go a long way towards helping you save up for your next purchase.

After reading this article, you’ll better understand where you can find the highest yields across the UK, and you’ll feel far more confident about taking action and investing your hard-earned cash.

#### What is a good property yield?

Great question – and something we get asked a lot by our landlords. We’d say that between 5-8% is a good rental yield to try and aim for. To work out your yield, divide your annual rental income by your total investment. Student towns have some of the highest rental yields but remember, you’ll most likely incur other costs.

## Check your property’s rental income in 60-seconds.

#### When it comes to property yields, it’s not so grey up North.

Pockets of the North West have boomed in recent years – and for good reason. If we take a look at the data we can see Kirkwall, Motherwell, Paisley, and Falkirk (all in Scotland) offer the highest rental yields of anywhere in the UK. The combination of low property prices and a steady monthly rent means these areas offer a great investment option for landlords. If you’re looking for incredibly high yields – some of which sit at over 10%, then these parts of Scotland are a great option.

#### The North East offers great buy-to-let opportunities

North East England is the next most dominant area for investors. Newcastle offers some fantastic buy-to-let yields – averaging around 7.08%. A cluster of similar university cities up in the North East generate similarly high buy-to-let yields, with Middlesbrough generating a yield of 6.23% and Sunderland offering 6.74%.

We can see a clear trend with high yields across the UK. All of the top hotspots are in Northern England or Scotland. The significantly lower house prices in these areas certainly play a role in the higher yields generated for investors. If this is your goal and you’re looking for properties with good yields to help build your future deposits up, then these regions are golden.” says Sharon Donaldson, Managing Director at Countrywide.

#### Where else offers high yields for investors?

As you can see from the graph below, asking prices over the last year have sky-rocketed. This just further demonstrates the capital growth still available in the purchase of property and the long-term returns that can be expected.

Liverpool and Sunderland swoop in next, with a yield of 6.98% and 6.74%. Liverpool currently has an average asking price of around £90,000. One of the big reasons it’s such a great place to invest is because it has a thriving student community, and a constant stream of diverse, high net-worth industries based in the city. Young professionals are a key rental demographic here. Predictions estimate that the North West region, in general, will see house prices rise by 24% through to 2024, so it’s a great place to invest.

#### The next city on the list is currently generating a yield of 6.09%

Manchester is next; one of the UK’s most exciting cities and it’s constantly in demand. It has a growing population of 2.7 million people who need affordable places to live as well as a thriving business scene, aided by establishments like the BBC and MediaCityUK. The yield here is 6.09% and there are so many areas to invest where you’ll receive both good yields and also capital growth. In fact, the average value of residential property in Manchester is set to grow by 17.1% by 2024.

#### Where are the UK’s worst areas for buy-to-let yields?

Unsurprisingly, higher house prices have a knock-on effect on rental yields. The top 5 worst postcodes for rental yields are NW, SW, W, WC, and EC – all of which sit in London. The City of London actually offers a 3.43% rental yield despite having incredibly high monthly rents. It’s worth remembering that house prices have risen by £380,200 since 2011 and £739,800 since 2001. So if you’re looking for areas of capital growth, the City of London is quite a safe bet.

You can learn more about where property prices have increased this year in our latest blog post. We recommend that you do your own research before committing to any investment.

Here is the gross rental yield calculator. Use this calculator to quickly and easily calculate the gross rental yield of any property.

Simply enter the purchase price of the property and the weekly rent and it will automatically calculate the gross rental yield for you.

This is also known as The 11 Second Rule Calculator

If a property is over 10.4% rental yield it passes what is known as “The Quick Test”. This is also known as “The 11-Second Rule” which was made famous by Steve McKnight in his book 0-130 Properties in 3.5 Years.

This occurs when the weekly rent of the property is double the price of the property (divided by 1,000).

Gross rental yield is calculated by taking the purchase price (or value) of a property and dividing it by the annual rental income.

## Other Helpful Property Calculators

House Deposit Calculator – Quickly calculate how much money you will need for your house deposit.

Saving My House Deposit Calculator – Easily calculate how much you will need to save each month, week or day to achieve your savings target.

## Tools for calculating cash flow accurately

There are a few tools out there for calculating the cash flow of your property effectively. Most are quite expensive and hard to use.

That why I created Property Tools. A online calculator that allows you to quickly and easily estimate the cash flow of any property in seconds.

Simply enter purchase price and rental income to get an initial estimate, and then go into more details on each expense item to get a more accurate result.

Hand’s down the easiest way to calculate positive cash flow properties

[su_button url=”http://propertytools.com.au/pricing/” target=”blank” style=”ghost” background=”#21a3eb” color=”#21a3eb” size=”10″ center=”yes”]Get Property Tools Now[/su_button]

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With its blend of chic shops, cafes and bars, set amongst handsome period buildings and open spaces, Wimbledon Village appeals to tenants and remains an area where landlords generate healthy returns.

When contemplating a property investment, or considering whether your existing investment is a good one, you need to calculate rental yield.

Here we explain the meaning of rental yield, how to calculate it and what is considered a good rental yield.

## What is rental yield?

Rental yield is the annual rental income as a percentage of the property purchase price. BTL investors use it to determine the level of return an investment property can be expected to deliver.

## Rental yield v capital appreciation

Rental yield is not the only factor that determines whether a property is a good investment. Property investors also consider capital appreciation, which is the potential increase in the properties value. However, with increased uncertainty in the housing market, many landlords and investors are looking for steady rental yields rather than significant capital appreciation.

## How to calculate rental yields for UK properties

Calculate rental yield using this simple formula:

Rental yield = (Monthly rental income x 12) ÷ Property value

### Example

To calculate your buy-to-let investment’s rental yield:

• First, take the total rent received over a year. Assuming a two-bed property in Burghley Road has a rental value of £3000 per calendar month, that would work out to be £36,000.
• Next, take the purchase price of the property (£845,000) and add that figure to its buying costs (£57,600 stamp duty plus £2,000 professional services fees). That gives you a total of £904,600
• Now perform the following calculation: 36,000 ÷ 904,600 x 100 = 3.97%.

## What if I have a mortgage?

The above calculation assumes the investment property was purchased without the need for a mortgage. The formula needs to be tweaked slightly to work out your annual return or yield taking the property loan into account.

Rental yield = (Monthly rental income x 12 – Annual mortgage costs) ÷ Investment

### Example

Let’s assume the investor takes out an interest-only buy-to-let mortgage for 80% of the purchase cost (£676,000) at a rate of 3%. That would result in monthly payments of £1,689 or £20,268 per year.

• Subtracting the mortgage interest payments from the annual rent of £36,000 leaves a profit of £15,732 per year.
• Take the deposit put down (£169,000) and add that figure to the purchase costs (£59,600). This gives a total investment of £228,600.
• Now perform the following calculation: 15,732 ÷ 228,600 x 100 = 6.88%

## What is a good rental yield?

Between 5-8% is a good rental yield to aim for. With interest rates even on the best bank deposits historically low, even modest yields compare favourably. Not only that, but the value of property in Wimbledon Village is also likely to appreciate if the investment is held for ten years or more.

## Points to remember when calculating rental yield

However, it is wise to remember that a landlord’s actual income from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been met.

Void periods – When calculating rental yields, bear in mind that it is unlikely that the property will be occupied for 12 months of the year. You might want to stress-test your calculations using 11 months of rental income.

Additional costs – The above rental yield calculations consider purchase cost, stamp duty tax, solicitors fees and mortgage costs. However, you are likely to incur other costs both in buying and running your property. Home Buying Surveys, insurance, mortgage arrangement fees, redecorating and maintenance, as well as furniture and white goods, are just a few. You will get a more accurate rental yield figure if you include ALL costs when calculating the total investment amount.

Rent – If you are calculating yield on a property you are considering buying, you will have to estimate the rent your prospective investment could achieve. You can research the asking rent of similar properties on Zoopla and Rightmove or ask a local letting agent for advice. However, bear in mind that this is not necessarily the amount you will achieve.

## What is the difference between gross and net rental yield?

Gross rental yield is the return you can expect before expenses. This figure is helpful because it allows property investors to compare buy-to-let investments against each other easily. Mortgage providers also use gross rental yield to assess the affordability of buy-to-let mortgages as the specific costs of owning the property are not yet known.

Net rental yield considers the costs associated with running and managing the residential investment. These costs may include:

• Insurance
• Letting agent fees
• Maintenance costs
• Running costs during void periods (council tax and utility bills)
• Cost of furniture and white goods

Calculating net rental yield gives a more realistic comparison against non-property investments that don’t carry such costs.

The difference between gross and net rental yield is usually between 1-2%.

## We can help

Robert Holmes & Co has a database of buy-to-let investors who have expressed an interest in a wide range of property in and around Wimbledon Village. If you want to maximise the sale value of your property, contact us today and learn what it could be worth.

About the author

### Nicolas Holmes

Nick joined Robert Holmes to inject fresh ideas and help grow the New Homes department of Robert Holmes as well as helping to inject technology into the business and to grow its client base. Together with one of the Directors Nick is in charge of all Development opportunities that Robert Holmes deals with along with sales. Aged 40, he provides succession together with the two existing directors. Nick has always been focused on building client relationships and sales. He built up his own gallery in Chelsea, where he had a loyal following of customers and artists.

When considering investing in a buy-to-let, the rental yield for the property is a big consideration. It’s also something your buy-to-let mortgage lender will want to know.

But what is rental yield? Well, it’s how much money you’ll make on renting out a particular property. It’s calculated as a percentage and anything over 4% is usually considered a decent yield. The higher, the better.

So, what are the sums involved in the calculation? It’s quite simply really. It’s how much you paid for your property, compared to how much annual rent you’ll get for it, minus any expenses such as solicitors fees for buying it in the first place and any repairs or maintenance you have to spend money on.

The yield can be calculated as a ‘gross’ figure or a ‘net’ one. The latter takes in all running costs for the property. It’s the gross yield your mortgage lender will want to hear.

A typical gross yield is found by dividing your annual rental income by the value of the property.

For example, if you paid £70,000 for a flat and you received £400 a month in rent. This would bring your annual rent to £4,800

£4,800 / £70,000 = 0.0686

Multiply by 100 = 6.8%

## Capital Appreciation

Capital appreciation is the amount of money by which your property increases in value over the years. This can often be pretty spectacular when considered over a couple of decades.

Capital is the bricks and mortar (the physical side of the property). Property pretty much always increases in value as it keeps in line with inflation and the economy as a whole. The only times it doesn’t, and can actually lose value is when we’re going through a recession. But even then, the loss is usually short-term and it tends to balance out after a couple of years then start rising again. It’s why many investors see property as a long-term investment (unlike stocks and shares).

## Insurance

This could cost up to 3% of the annual cost of the rent. But it is essential – especially for the building itself. You could consider both Landlord Insurance and Rent Guarantee Insurance, for instance.

## Repairing Fixtures and Fittings

Natural wear and tear dictate that there will items to replace at the end of a tenancy (particularly if it’s been a long one ie three years). If your inventory is good and up-to-date then use this to gauge replacement items. You can then claim them back as replacement expenses when filling out your self-assessment tax form.

No doubt after three years the property could also do with some decorating.

## Maintaining the Property

You’ll need to get your roof and guttering checked every couple of years, keep the boiler in tip top condition and get a gardener in to tidy up the garden. You might also want to get a damp proofing course – or at least, do a regular check for damp, especially if your property is a Victorian or Georgian tenement and/or more than 100 years old.

## GroundRent

Leaseholders may not have the freehold which means there will be the cost of a ground rent to factor in too.

## Empty Periods

Your flat may not always be let out. When it’s empty it’s regarded as a void period. Rent Guarantee Insurance can cover this for a certain number of months, but that’s a cost in itself.

## Agent Fees

If you don’t have the time – or even the inclination – to maintain your property yourself then you can always use a letting agent. This too will cost and is usually anything from 10 to 14% of your annual rental income – and which will also eat into your rental yield.

Looking for an online property agent you can trust? Then get in touch with the team here at propertyloop.co.uk.

Built by experienced property investors and landlords, the website connects renters and owners directly. Why not sign-up to see it in action?

It’s a free platform that only charges a small fee once you get your rent money in. Your property is featured on all major search and comparison portals as well as advertised by PropertyLoop everywhere else on the Internet.

You don’t have to worry about finding good renters since that’s the job for the platform. Receive offers straight to your mailbox and select the renters that are right for your property.

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When you’re looking for an investment property, you are often either looking for capital growth or yield. Yield is the income you receive in rent, ideally giving you a positive cash return. The projected yield is treated as income by the bank when assessing your mortgage application.

Doing the maths can feel a bit intimidating when you’re new to the investment game but don’t worry, there’s a quick and easy trick that we use to calculate yield on any property we’re looking at.

## Calculating yield

You’re going to need the following bits of information:

• the purchase price &
• the rental income per week

You then divide the yearly rental income by the purchase price.

As an example, a \$600,000 property might receive \$500 per week rent.

\$500 * 52 weeks is \$26,000

\$26,000 / \$600,000 is 0.043 (or 4.3% return).

So this property has a 4.3% (gross) return based on rental income to value alone.

## Are you looking for investment property?

It’s not always easy to get started. What do you need to know?

We’ve put together the most important things to know when you’re looking at buying your next Investment Property and we are giving it away for free.

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Is your rental property a B league player, or a star performer? Measuring its performance will help you to decide what to do next: sell it and buy something else, take out equity to buy another – or, at the very least, have peace of mind that the figures do stack up.

Doing these sums is a key part of creating a business plan. Before we dive into the maths to help you do that, a quick note: apart from stamp duty, tax is not included here. Because tax is so specific to your individual circumstances, it’s impossible to account for it in these generic formulae.

#### Measuring income

There are three simple ways to measure income success, each useful in a different setting:

Gross yield
If someone talks about ‘yield’ without saying which type, they usually mean gross yield. This is the yield before you’ve taken any costs into account:

What is a good yield? As a rough rule of thumb, once you’ve accounted for costs, you’ll struggle to break even on a gross yield under 4%. For a better income, look for a gross yield of 7%–9%.

You’ll hear the term ‘yield’ thrown around a lot if you’re looking at buy-to-lets. Be aware, though, that many people misunderstand what it means, or even deliberately try to mislead you with glossy yields. Do your own sums.

When it’s useful. As a rough-and- ready shortcut to compare properties that are likely to have similar running costs, like two modern flats.

Net yield
To be more precise, factor in your running costs. Net yield takes into account mortgage interest, agent fees, repairs, service charges, insurance and loss of income when the property is empty – all of which we’ll cover in more detail later. If a seller quotes you a net yield, do check what they include so you can compare like with like.

When it’s useful. To compare properties that have different running costs – a flat and a house, say, as long as you can accurately estimate the expenses.

Return on investment (ROI)
In the net yield calculation above, 1% sounds like a paltry return. Why bother with tenants and tradesmen if you can just as well stash your cash in a savings account? Crucially, though, the cash wasn’t all your own – you borrowed much of it from the bank. Enter the power of leverage.

If you have a mortgage, calculate the yield based not on the purchase price, but on how much of your own money you invested:

Ta da! Suddenly all the bother seems worth it.

To get the whole picture, under ‘cash invested’ add all purchase costs to your deposit: stamp duty, surveys, legal and mortgage fees.

When it’s useful. To see how hard your money is working not just compared to other properties, but also to other asset classes. ROI helps you decide whether to invest in property, stocks or cash.

Measuring growth
When you’re buying a new property, stick to the three income calculations above to compare options. Even if you’re buying with growth in mind, there’s no way to predict what future growth will be. The only certainty is that it will differ from what you expect.

However, if you are deciding whether to sell or keep letting out your existing home, you can take its past capital growth into account:

You can then use this annual capital growth to work out your total property return:

Pffft, try to beat that with a savings account. Yet before you crack open the champagne to celebrate your paper profit, bear in mind that it’s just that until you actually sell. Before then, its increase in value is pure theory; ultimately it will be worth what a buyer pays for it.

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In the post-Brexit world of jittery prices, tax changes and 140-plus landlord laws, this Amazon bestseller tells you how to let out your own property with complete peace of mind.

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