Generally speaking, a landlord’s main concern should be buying the property which offers the best ROI (Return On Investment). Perhaps an important aspect many novice landlords don’t pay enough attention to, as they’re often too busy focusing on the superficial qualities. Don’t get me wrong, I totally get it. And of course, looks matter.
However, it’s imperative to remember why you’re buying the property in the first place; it’s an investment to make money! That means buying a property that offers the best return should be the goal.
And how do we work out which rental property will offer the best return? We calculate the Rental Yield.
As a landlord, or more specifically, a new/upcoming landlord, have you ever been torn between multiple properties? I have. And so has John.
For example, John wants to be a landlord, so he’s on the hunt to buy a suitable property to rent out. John has seen 2 properties he likes. Property 1 costs 150,000 with a potential rental return of £600pcm. Property 2 costs £180,000 with a potential rental return of £775pcm. Which is the better buy?
If making money is John’s primary objective (which it almost certainly should be), then common sense dictates that the property with the highest rental yield should be the property in our cross-hair.
Table of contents:
What is Rental Yield?
Yield is a way of calculating the ROI on your BTL.
There are different ways of calculating yield, but in our case, we’re going to use the most common for BTL: the ‘rental yield’ is the total amount of rent minus the running costs (mortgage payments, insurance, repairs and maintenance etc.), divided by the total amount invested to purchase the property (that should include all fees, including tax and legal fees).
The higher the yield, the better.
How to Calculate Rental Yield (The Formula)
mrr = monthly rental return
i = investment
Yield = mrr*12/i*100
Rental Yield example 1
Monthly rental return = £600
Investment = £150,000
£600 * 12 = £7,200
£7,200 / £150,000 = 0.048
0.048 * 100 = 4.8 % yield
Rental Yield example 2
Monthly rental return = £775
Investment = £180,000
£775 * 12 = £9,300
£9,300 / £180,000 = 0.0516
0.0516 * 100 = 5.16 % yield
Although property 1 costs less to buy, property 2 offers the better ROI. However, it’s important to note that the yield can change over the duration of the investment, as house prices change.
What is a good Return Yield percentage?
It’s actually a subjective issue, which probably doesn’t help you out. Some consider anything about 5% a good yield, while others believe 8 is the magic number.
I personally believe any property which has a return yield of 7%+ is extremely good. I certainly wouldn’t put my nose up at a property which generates that kind of bang.
To make life easier (because that’s what I’m all about), you can use the calculator below to calculate your Rental Yield, whether it be for your current BTL, or a prospective investment…
Points to remember when calculating Rental Yield
While calculating the Rental Yield of a BTL property is relatively straight forward, there are a few points to consider:
- Void periods – ignoring void periods is a common mistake, and if you fall victim it can easily skew your calculations. When calculating the yield, bear in mind that it’s unlikely you will always have a occupied property for 12 months of the year, so the total income won’t always be 12 months x £Monthly rent. There maybe times where you will have void periods, whether it be in-between tenants or at the very beginning of your investment. So you may want to “stress-test” your calculations by using 11 months’ worth of rental income.
- Rent – If you’re in the midst of your research phase, and you don’t know how much rent your prospective investments can achieve, you can look on portals like Rightmove, Zoopla and Guntree to see what other similar properties in the same area are demanding. Alternatively, you could talk to a local letting agent. However, bear in mind, the “asking price” isn’t always the amount achieved.
- Total costs – when calculating your yield, it’s important to use the real figures to get the most accurate calculations. So when using the total investment amount, it should include ALL your costs, which may include the following:
- Cost of property
- Tenant acquisition
- Mortgage product/arrangement fee
- Solicitor fees
- Survey fees
- Any other legal fees
- Cost of redecorating/maintenance
- Running costs during void periods (e.g. council tax, utility bills)
- Costs of furniture/white goods
- Be wary of yield calculations – when you hear agents or developers talk of yields they can often sound incredibly attractive, and this is when you should start asking questions. They often make their calculations based on basic cost of the property and essentially ignoring all the costs associated with buying the property (as per the list mentioned above), which obviously skyrockets the yield and makes the deal seem sweeter than it actually is! Buyer beware!
Best Rental Yields in UK 2018/2019
Totallymoney has published data on the highest buy-to-let yields in Q4 2018; they analysed data from 580,000 properties across England, Scotland and Wales.
While these are only averages, and don’t account for ‘special cases’, which include high-yielding individual gems, it does give a good indication where the highest yielding areas are.
|Location||Postcode||Average Rent (Monthly)||Average Asking Price||Rental Yield|
How important is Rental Yield?
Haven’t you been being attention? It’s critical!
Essentially, you want a good yield to make your investment worthwhile, because not only will it put more cash in your pocket, but it will also be more resilient during economic downturns!
However, I do want to stress that the best rental properties to invest in strike a balance between yield, location, rental demand and capital growth (based on data)!
For example, if I had a choice between a property with a 8% rental yield in a shitty area with high crime rates and a property with a 7% rental yield in a good area, I’d go for the latter all day long.
Find the balance by taking into consideration all the essential factors!
So, what you got? What’s your Yield?
Interested in buying a BTL and becoming a landlord?
I would be remiss to check out of here without pointing all wannabe landlords towards my ‘Ultimate Guide For New & First-Time Landlords‘. Long story short, it’s a 100+ page blueprint on how to be a landlord, covering A – Z, including tips, advice, legal crap, how to find and manage tenants etc. It’s all there. Plus more.
It’s free to download, so go ahead and grab your copy from here. If you want.
Disclaimer: I'm just a simple landlord blogger; I'm not qualified to give legal or financial advice. Any information I share is my opinion based on my personal experiences as an active landlord, and should never be contrued as legal or professional advice. For more information, please read my full disclaimer.