Beautiful Belgravia with its splendid Regency terraces, gorgeous garden squares, and tranquil feel will always appeal 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.
Rental yield is a crucial consideration for any buy to let investor. It allows you to determine whether a property is likely to be a good investment. But how do you work out what your rental yield is and what is considered a good number? We have put together this guide to explain how to work out rental yield.
What is rental yield?
Rental yield is the profit you expect to earn from a property expressed as a percentage of the total amount invested in purchasing the property. Landlords and property investors use it to measure the return on investment of property they already own or assess whether a property they are considering buying will be a good investment.
Rental yield v capital appreciation
There are two ways to make money from property investment; rental income, which is measured by calculating rental yield and capital appreciation, which is the increase in the property’s value over time.
Both are important. Buying a rental property that loses money each month in the hope of future capital gains is a lousy investment. So too is a buy to let property whose annual return on investment is wiped out by falling property prices when you want to sell.
How to calculate rental yield for UK properties
There are different ways to calculate rental yield, but 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
In this formula, rental yield is the annual rent minus running costs divided by the total amount invested in buying the property. This is multiplied by 100 to give a percentage.
If you already rent out the property, you will know how much rent is achievable. However, if you are calculating the rental yield for a property you are considering buying, you will need to estimate this figure. Look on property portals such as Rightmove and Zoopla for the rental cost of similar properties, but remember the property may let for less than the advertised price. Consult trusted local estate agents for their estimate.
Remember that you are likely to encounter some void periods. Therefore, we recommend stress testing your calculation by assuming the property will be unoccupied for at least one month each year.
Sit down and work out a budget for how much you will set aside each year for operating costs and maintenance. Typical expenses for rental properties include:
- Mortgage interest
- The service charge for leasehold properties
- Letting agent fees
- Utility bills and council tax during void periods
- Periodic redecorating and replacing worn carpets etc.
- Ad-hoc maintenance like replacing a broken boiler or white goods
There are two main techniques investors use to estimate property maintenance costs.
- Percentage of rental income – Set aside between 15 to 20 percent of the annual property rent. So, if you earn £100,000 per year in rent, then expect operating costs to be between £15,000 and £20,000 per year.
- Percentage of property value – Set aside between 1 and 1.5 percent of your property’s value. So, if you bought your rental property for £1.5 million, plan to spend between £15,000 and £22,500 on running costs.
For properties bought out-right, this is the purchase price of the property. If you funded the purchase with a buy-to-let mortgage, use the deposit you put down.
Add to this the costs that come with buying. The main cost involved with buying a property is stamp duty. Use the government’s stamp duty calculator to work out the tax payable.
As well as stamp duty, you should also factor in:
- Legal fees
- Surveyor fees
- Mortgage product/arrangement fee
- The cost of getting the property ready to rent out
Example rental yield
Here is an example of a rental yield calculation on a typical two-bedroom apartment in Belgravia.
- A two-bedroom apartment in the heart of Belgravia would set you back around £1.4 million. You could expect a rental income 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%.
Be wary of yield calculators
Be wary of yield calculators. They do not include all the costs of buying and maintaining the property. As a result, they are likely to produce a much more favourable (but unachievable) rental yield number.
What is a good rental yield?
A rental yield between 5% and 8% is considered good. For the best possible return on investment, aim for the highest rental yield achievable.
The best rental yields in the UK by area in 2020
So, where in the UK offers the best rental yields? Totally money have analysed the data of nearly 500,000 properties across England, Scotland and Wales. The top ten areas in the UK for rental yields are:
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.