Beautiful Belgravia with its splendid Regency terraces, gorgeous garden squares and tranquil feel, will always be appealing to tenants with a big budget and a yearning for city living.
Changes to the rules around buy to let over the past few years, including the 3% stamp duty surcharge on second homes, have made it less of a lucrative prospect. However, Belgravia’s popularity means that anyone buying a property here is likely to see a return on their investment.
When you’re weighing up a property investment, calculating its rental yield is key. If you’re wondering ‘how do I work out rental yield on a property?’ read on. We help you do the maths to see whether a buy to let flat in Belgravia might be a good investment.
What is Rental Yield?
Rental yield describes your annual rental income, as a percentage of the total value of the property. It is used by buy-to-let investors to determine whether or not a property will be a good investment or to understand the return on investment of a property they already own.
Rental yield v capital appreciation
Rental yield is not the only factor that might determine whether or not it’s a good idea to invest in a specific property. The potential for capital appreciation, the increase in the value of the property itself, is also a consideration for many landlords.
How to Calculate Rental Yield for UK Properties
To calculate yield you apply this formula:
Rental yield = ((Monthly rental income x 12) ÷ Property Purchase Price) x 100
To calculate your buy to let investment’s rental yield, start by taking the annual rental income. The average rent for a property in Belgravia is currently £2,000 per week, which adds up to an annual rental income of £104,000.
Next, take the purchase price of the property, let’s use the average cost of a flat in Belgravia, currently £1.6million.
Add to that the costs that come with buying. The main cost involved in buying a property such as this is stamp tax. Using the HMRC stamp duty calculator, the tax payable on this property would be £154,000.
Add an estimated cost for professional fess of £3,000 and you have a total cost of £1,757,000
Now perform the calculation: 104,000 ÷ 1,757,000 x 100 = 5.9%
This calculation assumes the property investment was purchased outright, without the need for a mortgage.
What if I’ve taken out a mortgage?
To work out your rental yield taking a property loan into account, your annual mortgage costs should be subtracted from the £104,000 received in rent.
Say you took out an interest-only buy to let mortgage for 75% of the purchase cost (£1.2 million) at a rate of 3%. Your monthly mortgage payments would be £3,000, or £36,000 per year.
Subtracting that figure from the annual rent of £104,000 leaves a pre-tax profit of £68,000 per year.
To calculate the yield, take the deposit you put down (£400,000) and add that figure to the buying costs (£157,000). This gives a total of £557,000.
Now perform the calculation: 68,000 ÷ 557,000 x 100 = 12.2%
What is a good rental yield?
Most commentators regard a rental yield of 7% or more as a good return on your property investment. Even the 5.9% yield, if the property is bought outright, is much higher than the interest you’ll receive from a savings account – the best, easy-access rates available are currently around 1.4%.
Points to remember when calculating Rental Yield
Bear in mind that a landlord’s true income from a buy to let investment is the amount of rent left over after all the other expenses associated with the property have been met. These can include covering void periods, maintenance costs, landlord insurance and the fees charged by letting agents.
Remember too that every buy to let investment is different and the rental yield you achieve will vary depending on the cost of the property and the rent you are able to charge, as well as other factors. For this reason, the figures quoted above are for illustration only.
How can I 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 will bring the rental yields you are looking for.