Calculating and maximising Rental Yields

The Rental Yield is how a property investor describes the annual rental income, relative to the purchase price of a property - expressed as a percentage.

It’s a particularly useful measure when comparing different properties within your portfolio, plus it can be a useful target for landlords when considering future investments. 

Gross versus net yield

There are two ways of calculating yield.  Gross yield is a simple calculation which looks at the value of the property when it was purchased versus the rent usually received. 

So, for example a property was bought for £250,000, and the rent is £1,000 per month then the yield is 4.8%; that’s because £12,000 rental income divided by £250,000 expressed as a percentage is 4.8.

However, this rather rudimentary calculation doesn’t consider the other costs which a landlord may have to pay out.

Houses of Multiple Occupation (HMO) versus Family Homes

Whilst some landlords find the headline rental yield usually enjoyed by owners of HMO’s attractive, these types of homes are more likely to have a high churn of tenants and possible void periods.  Meanwhile, family homes may only change tenants every four or five years.

 

Therefore, calculating the true, or net rental yield will include incorporating the additional costs a landlord has to pay.

These costs include fixed and known costs such as mortgage repayments, leasehold costs and insurance premiums.

Meanwhile, there are some less-regular costs to factor in, such as any void periods where no rent is being received, together with cost of finding new tenants and also refreshing the home between lets.

Incorporating these costs into your calculations will help you understand the true yield.

Maximising yields

The first place to start is to look at your fixed costs. For example, some landlords are taking advantage of the low interest rates and establishing whether there are better mortgage deals available. 

However, taking some careful steps with your choice of tenant can help reduce the one-off costs which are often associated with changing tenants.

Ensuring a tenant can afford their rent should help avoid unpaid rent.  Plus, a tenant who has a positive reference from their current or a previous landlord will undoubtedly want to protect their personal record as a tenant and may be more likely to take care of any furniture and furnishings you’ve put in the property.

Our Investor Services Team can help you calculate the rental yield of properties in your portfolio, as well as helping you find properties with impressive yields all across the UK.  To speak to a member of the team email kate.hurles@darlows.co.uk or call 07960 120267.