As a property investor, rental yields are one of the main ways you’ll earn an income off your initial investment. Yields are the annual profit you’ll make whilst renting out your property. This is usually worked out as a percentage figure of the initial investment. Yields are a great way of working out how successful your investment is, but how do you calculate rental yield on your property?
How to calculate rental yield?
Rental yields of a property are calculated by taking the annual rental income and dividing this by the property value. Times this number by 100 and you’ll have the rental yield percentage of your property.
To give an example, imagine you purchase a property for £180,000. Due to the local amenities and attractiveness of the area your property is in, you decide to charge £1,000 per month in rent. Multiply this by 12 and over the year your annual rental income will be £12,000. Divide your annual rental income by the total property value (£12,000 divided by £180,000) and times the result by 100 to give your rental yield percentage. In this instance, your rental yield would be 6.67%
Net Rental Yield
The formula above gives us a quick and easy way to work out gross rental yield, however the net rental yield will differ to this.
Like any forms of income, the net rental yield will be slightly lower, as this figure factors in all outgoings and expenses associated with the property. This is the eventual yield you’ll end up earning from your property. Things to consider that will affect your net rental yield include:
- Buying costs; Upon buying your property, a UK government charge known as Stamp Duty is taken on the sale of your property. This amount is between 5-8% of the property’s value. As well you may need to factor in any admin costs or legal costs incurred in the purchase.
- International Investor Taxes; If you are an international investor, there may be additional charges and taxes from your country of residence. In a lot of countries, Double Taxation Treaties are in place to prevent foreign investors paying double or excessive tax on these investors. It’s important to know what will need to be covered here and how this might affect your costs on owning a property. For more information on Double Taxation Treaties, click here.
- Maintenance Costs; Whether you choose to fully manage the property yourself, or let an agency do this for you, you will incur some expenses here. These include routine repairs, property maintenance, and grounds keeping. Bills such as water, gas and electricity are passed on to the tenant, however if your property remains vacant for an extended period of time the costs will need to be covered by you and affect your net rental yield.
This isn’t an absolute science as costs can be affected by a various number of factors including location, amenities, agreement terms and developer or agent requirements.
Rental Yields in the UK
Compared to the rest of the UK, Manchester and the North West region have some of the highest rental yields due to significant house price growth in these areas.
On our recent developments, investors can look to benefit from up to 7% rental yields on properties like Axis, and rental yields of 6% across Oxygen, Excelsior and Uptown. These are all considerably higher than many UK postcodes, with areas such as London averaging between 2% and 3% for rental yields.
Think you’re ready to make the most of your rental yields? Find out more about how much rent to charge on your property here, and some of our top tips on becoming a great landlord.
Still have some questions about rental yields and how Alliance Investments can help you to maximise your returns? Get in touch with a property expert today.