Understanding your possible rental yield is a fundamental part of becoming a landlord. As a property investor, you can look to identify what a desirable yield is and calculate what you will need to get there. Let’s take a look at rental yields, what they are, and why they matter.
What is a rental yield?
The term ‘rental yield’ refers to the potential amount of money your property can make through rental income. This is often expressed as a percentage of the market value of the property. While yields can be calculated for any period, annual yields are most commonly used.
Why do rental yields matter?
When it comes to investing in property, obtaining a good return on investment (ROI) is often the primary objective.
Working out your potential yields ensures you can strike the balance for rent, and that you aren’t selling yourself short or overpricing your property. For example, if your potential income falls short of your expenditure, or if you only manage to break even, something unexpected as a boiler repair could leave you out of pocket.
On the other hand, if what you’re charging in rent exceeds the market rate, you may struggle to obtain tenants.
What’s the difference between gross and net rental yield?
Gross and net rental yields might sound like complicated business terms, but the difference between the two is simple:
The gross rental yield is the total amount of money your property makes before expenses. This is calculated using the price of the property and the income generated by the property.\
The net rental yield is everything you make after expenses. You can calculate this by adding the price of the property to the income generated through rent, and then subtracting the associated fees and costs of owning and maintaining the property
- Multiply your monthly rental income by 12 to get the annual figure
- Divide that figure by the property’s purchase price
- Multiply that figure by 100 to get your gross rental yield percentage
MONTHLY RENTAL X12 = ANNUAL RENTAL INCOME
ANNUAL RENTAL INCOME / PURCHASE PRICE×100 = RENTAL YIELD PERCENTAGE
If your tenants pay rent weekly, multiply the figure by 52 to get your annual rental income.
If you haven’t bought the property you’re interested in yet, you could look to use the current market value and your anticipated rental income to estimate potential rental yields. Its worth speaking to the agent so they can help advise on achievable rental incomes and assist on your property journey.
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