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How do you figure out rental yield on a buy to let property?

6 Jun 2014
How do you figure out rental yield on a buy to let property?

Rental yield is basically what a buy to let investor makes on their rental property spread over a year, after all costs associated with renting the property are deducted from the rental income.  Rental yield is often expressed as a percentage.

Let’s break that down so it makes more sense.

Rental income is what the tenant pays the landlord.  This may grow over time, particularly if you’ve chosen to buy an investment property in an area experiencing regeneration like Acton, or an area soon to get a Crossrail station like Ealing or Hanwell.

There are also costs associated with renting a property including buildings insurance, replacement of fixtures & fittings, property upkeep and maintenance, ground rent and service charges, allowance for void periods when the property may be empty and agency fees.  The biggest cost that most landlords will have is their mortgage.

First take the purchase price of the property and add all the costs associated with buying it (including solicitor’s fees, survey costs, mortgage arrangement fees – click this link to see more costs of buying property that you may want to consider).

Then you have to deduct all the costs of renting for the year from the rental income for the year to arrive at your expected “net rental income”.

To find the net rental yield you would take the net rental income and divide it by the total cost of buying the property.

So for example:

If you bought a property for £350,000 including all the costs of buying it (that’s a very round number but for the sake of clarity, let’s go with that).

And the net rental income was £20,000 with all the costs of renting deducted.

Then you would divide 20,000 by 350,000 which comes out to 0.057.

Let’s round that down to 0.05 and that equates to 5% rental yield.

How do I know what is a good rental yield?

First of all, ideally you want to find a property that will earn you more than you pay for your mortgage and your expenses.

Watch out for interest rate rises

Be aware that your rental yield will be affected by changes in interest rate if you have a mortgage on your buy to let property as your mortgage payments may go up.  So think about how an interest rate rise might affect your bottom line.

However, there is another type of income from investment property which is called “capital growth” or “capital appreciation”.

What is capital growth?

Capital growth is when a property’s value goes up over time.  In Ealing and Shepherd’s Bush and in fact in most of West London we’ve seen great capital growth recently with prices going up in our core West London areas over the past year.

However with fluctuations in the market, how much your property appreciates over time can go up and down, so it is important to buy an investment property with a longer term goal in mind in order to see good capital growth.

What is an average rental yield?

What is considered good rental yield will depend on where you are buying your investment property.  In London, rental yields tend to be lower than outside London, but capital growth in London tends to be higher.  So if you are thinking of buying a rental property in London then a longer term view is usually the best idea.

Do you have questions about buy to let investments in London?  Our award winning lettings team is happy to help, call us on 0208 799 3371 or tweet us your question @northfieldslive or ask us via our Facebook page.  We’re here to help.