What is a good rental yield?
If you’re thinking about investing in property, it’s a good idea to first work out how much you’ll need to charge in rent to make a decent return on your investment.
These days, it’s become even more important to charge a fair and reasonable rent for your property. After all, finding out the rental incomes for neighbouring properties is only a few clicks away. So, if you have to charge above-the-odds to make your investment worthwhile, the property in question probably isn’t for you.
With that in mind, we’re on hand with all the rental yield advice that you may need, starting with…
What is a rental yield?
A rental yield is the amount of rent you can expect to receive from your property in a normal year. The figure is always presented as a percentage, which is ascertained by dividing your annual rental income with your initial investment.
How to work out rental yield?
To calculate the rental yield on a property the old-fashioned way, you’ll need to divide the annual rental income by the price you’ve paid for the property and then multiply this figure by 100.
So, if you bought your property for £200,000 and you charge £10,000 per year in rent, you’d have a rental yield of 5%.
If sums make your head spin, it’ll be far easier and quicker to just use our online rental yield calculator.
What is a good rental yield?
It’s essential that your rental income covers the running costs of the property – so any mortgage repayments, wear and tear and/or lettings expenditure that you’d otherwise incur. Failure to do so would mean that you’ll have to dip into your contingency fund more often than you probably should.
So, what is a good rental yield? By and large, property investors aim to achieve a rental yield that’s around 5-8%. Principally, this should cover all of the necessary expenditure and provide you with a reasonable return on your investment.
What are the average rental yields in the UK?
Rental yields fluctuate depending on where you are. Last year, the best rental yields in the UK were found in Nottingham – which currently achieves an average rental yield of up to 12%. Elsewhere, it’s largely University towns which provide the savviest return on your investment.
So, why are university towns so lucrative for landlords? Why, student lettings of course.
Are student lettings a good investment?
Hmmm… that depends. So, it’s likely that you’ll achieve some of the best rental yields by letting to students but, if you’re after a long-term investment (as all savvy property investors will), you may want to look at your options.
With a student letting, you’ll probably have to look for new tenants more regularly – perhaps even annually. Advertising costs, letting fees and potential void periods will all have to be factored into your initial investment.
And, since it’s students, you’ll probably need to allocate more funds towards wear and tear. Would a short-term student care for your property as well a long-term tenant would? Also think about your resale value – how much will you have to spend on renovations to achieve an asking price that’s greater than what you originally paid?
In a nutshell: What’s a good rental yield?
- Between 5-8% is a good rental yield to aim for.
- Divide your annual rental income by your total investment to calculate your rental yield.
- Student towns have the highest rental yields but may incur other costs.
For more advice about rental yields, speak to a member of our buy-to-let team.