What Is a Good Rental Yield?
Money is at the centre of any investment. Building wealth is a key reason for investing in any asset and so keeping track of your investment’s performance is vital. With a Buy-to-Let property, one of the easiest ways to do this is with rental yields.
What is a Rental Yield?
Whether you’re a seasoned investor or are new to the property market, you will have heard the term rental yield. By measuring your monthly rent (as an annual sum) against the overall value of your property, this will give you an idea of how your investment will perform.
There are two types of rental yields that you will need to know about, and it’s crucial to be able to differentiate these from one another:
- Gross Rental Yield:
- Gross rental yield is the amount you stand to make before expenses, which is calculated by using the price of your Buy-to-Let property and the rental income it generates.
- Net Rental Yield:
- Unlike gross rental yield, this metric takes into consideration a variety of factors. Net rental yield is calculated using the price of your property, the monthly rental income it generates and any associated costs of owning the property.
For investors, it’s important to know the difference between these rental yields, and to know where you stand with each type.
Having a Buy-to-Let property comes with a lot of additional costs, such as mortgages, maintenance costs and property management services, all of which will come out of your profit. With this in mind, net rental yield can give you a more accurate idea of what you’re spending and how much you’ll have left at the end of each month.
What is a Good Rental Yield?
When considering these additional costs, you’ll naturally find yourself looking for and wanting a property with the highest rental yield. But when it comes to rental yields, there generally isn’t a one size fits all approach, as this metric is typically influenced by a variety of factors including location and property type.
For example, while the average gross rental yield for the UK currently sits at 3.53%, certain postcodes in Birmingham city centre are reaching up to 6%. Although Birmingham city centre remains relatively affordable (when compared to the likes of London), the opportunities, amenities and transport links across the city often attracts tenants willing to spend more, which in turn, contributes to these strong rental yields.
On the other hand, the average rental yield across London currently sits at just 2.83%, reinforcing the impact expensive property prices can have on this metric, despite the high rents across the city.
This is why when you’re exploring these different Buy-to-Let locations, you should also consider the future of the area. Areas that are undergoing regeneration, or are experiencing high demand, such as Bracknell, will often have considerable rental growth on the horizon. Specifically, towns across the South East are expected to see up to 8% growth in rents by 2025, which could mean higher rental yields for investors in the long-term but affordability in the short-term.
Although rental yields can fluctuate depending on several different factors, many professionals consider gross rental yields over 5% or 6% to be strong metrics. Overall, you should go for a rental yield that works best for you – one that will be able to cover all of your monthly costs and leave you with a reasonable profit at the end of each month.
How Do I Work Out My Investment Returns?
Knowing what to expect with your investment is crucial, especially in terms of profit and outgoings. The Investment Calculator has been designed to give you a starting point for your financial investment, where you can not only get an idea of what to expect in terms of rental yield, but also potential outgoings throughout your investment.
Rental yields are typically determined by external factors, but there are a few different ways you can maximise this metric. One of the most obvious ones is to alter your rent. If your monthly rental income is lower than the market average, there may be an opportunity for you to increase this accordingly, if your tenancy allows for it.
Alternatively, you could also consider a house in multiple occupancy (HMO). HMOs are typically rented by three or more people, and while there’s a lot to consider before changing your Buy-to-Let property to a HMO, this can often lead to higher profits. With multiple people renting the property, this translates into several rental incomes.
Capital growth is another source of income that investors can expect from their Buy-to-Let property. While rental yields can be used to offer an idea of what to expect in the short-term, capital growth is more of a long-term consideration. Essentially, this is the profit you make on a property, based on natural increases that may occur within the local market. Although capital growth is often most beneficial on a long-term basis, it remains a key return on your investment.
Rental yields are crucial for Buy-to-Let investors, with this metric offering insight into how much you stand to make on your property investment. While gross rental yields don’t account for monthly outgoings, net rental yields can offer a more accurate idea of profits, especially if you utilise investment tools and calculators. By doing so, you’ll not only be more prepared for any outgoings you’ll face, but you’ll also be able to get a starting point for what your investment stands to make.