How to Calculate Rental Yield of a London property

If you’re investing in buy to let in Belgravia, one of your main questions will be whether the property will bring a good return – in the long and short term. This prime area at the heart of central London will always have appeal for tenants and buyers. However, to get an accurate idea of whether a particular property is the right investment, you need to calculate the rental yield.

What is rental yeild?

Rental yield is a key metric for indicating the profit you will make from renting out the home. It is expressed as a percentage, meaning you can compare it to other forms of investment you might be considering.

Rental yield vs capital appreciation

There are two ways to make money from property investment; rental yield, and capital appreciation, which is the increase in the property’s value over time.

Both are important. Even if a property rises in value, it won’t be a good investment if you can’t make a profit from the monthly rent. Similarly, a buy-to-let property whose return on investment is wiped out by falling property prices isn’t a good prospect either.

How to calculate rental yield for UK properties

We recommend using the formula below as it produces the most realistic results.

Rental yield = ((Monthly Rental Income – Monthly Running Costs x 12) ÷ Investment) x 100

How do I work out the rental income?

If you are calculating the rental yield for a property that you are considering buying, look on property portals such as Rightmove and Zoopla for the rental costs of similar properties. Remember that you are likely to encounter some void periods, so stress test your calculation by assuming the property will be unoccupied for at least one month a year.

How do I calculate the running costs?

Work out a budget for how much you will set aside each year for operating costs and maintenance. Typical expenses include:

• Mortgage interest
• Landlord insurances
• Service charge for leasehold properties
• Letting agent fees

There are two main techniques investors use to estimate property maintenance costs.

• Percentage of rental income – set aside between 15 and 20 percent of the annual property rent.
• Percentage of property value – set aside between 1 and 1.5 percent of your property’s value.

Want to find out more? Explore what an energy performance certificate means for central London property and learn how to check a tenant’s right to rent.

How do I work out the investment?

For properties bought outright, the investment is the purchase price of the property. If you funded the purchase with a buy-to-let mortgage, use the deposit you put down.

• Stamp duty – use the government’s stamp duty calculator
• Legal fees
• Surveyor fees
• Mortgage arrangement fee
• The cost of getting the property ready to rent out

Example rental yield calculation

A two-bedroom apartment in the heart of Belgravia would set you back around £1.4 million. You could expect rent of £1,600 per week.

Your annual rental income would be £83,200.

Say you took out an interest-only buy to let mortgage for 75% of the purchase cost (£1,050,000) at a rate of 3%. So, your monthly mortgage payments would be £2,625, or £31,500 per year.

You estimate your annual maintenance costs to be £12,500.

This gives you an annual profit of £39,200.

The cost of your investment is your £350,000 deposit plus £118,250 stamp duty plus £3,000 for the survey and legal fees. This gives you a total investment cost of £471,250.

Your estimated rental yield for this property would be 8%.

What is the difference between gross and net rental yield?

The example above illustrates the net rental yield calculation. However, you may see the calculation expressed as gross rental yield. Gross rental yield does not deduct the costs associated with renting out property, so it will give you a less accurate indication of the profit you will make. Figures for gross rental yield are often used by estate agents or property websites to give a general indication of the market in particular locations – where the precise costs associated with renting out a certain property are not known.

What is a good rental yield?

A rental yield between 5% and 6% is considered good with 7% or above being very good. However, yields vary enormously depending on location and type of property. Think about what would be a good rental yield for you, covering your mortgage and other costs and giving you the income, you require besides.

How to maximise your rental yield

While rental yield is dependent on area, type of property and level of demand, there are some things you can do to boost your rental yield figure. These include:

• Check that you’re charging the right amount of rent – if yours is cheaper than comparable properties, you may be able to charge more.
• Conversely, charging too much may make your property harder to let, leading to void periods.
• Review your outgoings including your mortgage rate, landlord insurance costs and other fees to make sure you’re not paying too much as this will affect your yield figure.

What is capital growth and how is it calculated?

Capital growth, or capital appreciation is the increase in value of the property during the time you own it. It is calculated by subtracting the purchase price from the property’s current value. Remember that house prices fluctuate but ultimately rise over time, so you may need to hold on to the property for some time to get a good capital return. You will be liable for capital gains tax on the profit you make.

Want to know more? You can also read about the new Renters Rights Bill explained for landlords and explore our residential block management guide for central London.

Find out more?

At Best Gapp, we work with buy to let property investors to help them find the right place for their budget and needs. Contact us today to find out how we could help you find the investment that you are looking for.