When a landlord chooses an investment property, there are many things to consider. The most successful landlords have a clear grasp of rental demand, form strong relationships with estate agents, surveyors, solicitors, housing associations and mortgage brokers, but above all have a firm understanding of rental yield. But what exactly does rental yield refer to and how is it calculated?
Calculating rental yield
In simple terms, rental yield is a measurement of the potential return on an investment through rental income and is presented as a percentage.
A basic gross rental yield calculation involves dividing a property’s yearly rent by its price. Let’s say you want to purchase a buy-to-let property for £300,000 and intend to rent it out for £2,000 a month. You would divide the annual rental income (£2,000 x 12 months) by the purchase price (£300,000) and multiply the result by 100 to get a percentage. In this example, the gross yield is 8% (24,000 ÷ 300,000 x 100 = 8%). A more detailed net rental yield could be obtained by factoring in the annual costs of owning the property – such as mortgage, insurances, upkeep – and deducting this from your rental income figure in the calculation above.
Regional variations
Rental yields can differ vastly across the country due to variations in purchase price and rental demand. According to Fleet Mortgages’ latest ‘Rental Barometer’, the average rental yield across England and Wales was 7.2% in the Q3 period of 2024 – an increase of 0.3% on the same period in 2023. The highest average yield was found in the North-East region with a 9.7% average yield, followed by the North West at 8.0%. The lowest average rental yield was 5.9% in Greater London and East Anglia. With such variations, it is not uncommon to see landlords buy in areas outside of their locality to maximise profits.
Other considerations
Landlords can look at maximising yield by buying properties that require substantial refurbishment prior to letting. A below-market purchase price combined with cost-effective works to improve a property’s rental potential could considerably increase the rental yield. Many landlords also look at adding HMOs to their portfolio due to the potential they have to offer higher rental yields. By renting rooms out separately, it is possible to get a higher return on your investment.
Understanding the potential yield of a rental property is key metric for any landlord, but it is just one consideration. It is always important to carry out thorough due diligence and ensure that you have sought the advice of relevant property professionals.
Further information
https://www.fleetmortgages.co.uk/news/rental-yield-increases-slow-but-yearly-improvement-still-seen-across-all-regions-of-england-and-wales-fleet-mortgages-rental-barometer/
https://www.mfsuk.com/blog/how-to-work-out-rental-yield/
