Calculating yield

Rental yield is the value you can expect to achieve from a rental property in a year. It is expressed as a percentage of the property value, and is an important factor to consider when deciding the viability of any buy to let investment.

What is rental yield?

Rental yield is the return you are likely to achieve on a property through rent. It is a percentage figure, calculated by taking the property’s yearly rental income and dividing it by the total amount that has been invested in that property.

How to calculate rental yield

There are two ways to calculate rental yield – gross or net. Gross rental yield is everything before expenses. Net rental yield is everything after expenses.

Gross rental yield

You can calculate gross rental yield by dividing a year's total rent by the purchase price of the property and multiplying by 100.

1. Calculate total annual rent that you would charge a tenant.
2. Divide your annual rent by the property purchase price.
3. Multiply that figure by 100 to get the percentage of your gross rental yield.

So, if you were receiving £850 monthly rent (£10,200 a year) from your tenants, on a £200,000 investment, the gross rental yield would be 5.1%. 

In reality, gross rental is only relevant, once you own the property outright. Gross rental yield doesn't account for fees, finance payments, renovation costs, insurance and upkeep of the property. These costs should all need to be considered to calculate net decide if a property would provide a good return as a buy to let.

When would you use gross rental yield?

Gross rental yield is a fast and simple way of calculating the estimated return on a rental property when the maintenance costs are not known. Prospective landlords often use this calculation to compare potential investment properties.

Net rental yield

Net rental yield gives a more accurate projection of a properties potential return as a rental investment.

Net rental yield is calculated by taking the annual rental income minus costs associated with owning the buy-to-let property. This is then divided by either:

1. The property value, or
2. The initial capital outlay on the property (the full amount less what the Bank has contributed through your Buy to Let Home Purchase Plan)

When would you use net rental yield?

Net rental yield gives you the most accurate estimate of profit you could expect to achieve from an investment property. This calculation is used by landlords to predict ongoing profits once they have established all of their costs.

Costs to consider when calculating net rental yield

• Vacant periods – Your property may not be occupied for the full 12 months of the year. There may be a vacant period at the beginning of your investment, or between tenants. So your annual income may not always be monthly rent multiplied by twelve. You can stress test a potential buy to let investment by calculating yield with less than twelve months rent.
• Rent – When you are researching rent that is achieved by similar properties, it is important to consider the area, proximity to transport links and local schools, condition of the property and length of tenancy. All of these factors can impact rent achieved.
• Costs and fees – This can include additional costs such as solicitor and surveyor fees for purchasing the property, decorating and maintenance costs, fees for acquiring tenants, and running costs during vacant periods.

What is a good rental yield?

What is a good rental yield depends on your expectations as a landlord, the area and whether the property is single or multiple occupancy. A good net rental yield should cover all the necessary property expenses while allowing landlords to make a return on investment.

If your circumstances change

If your circumstances change unexpectedly, causing you financial difficulties, and you are concerned about making payments on your BTLPP, you should contact the bank immediately.

How to maximise rental yield

Assess the rent regularly

Rental rates change over time. When creating tenancy agreements, it is important to consider including rent reviews so that if the market rises, you can increase your rent. On the other side, if you have a vacant property and the rent is too high, you may wish to reduce it to encourage tenants.

Consider multiple occupation

A house of multiple occupation (HMO) is a single residential property which is rented by three or more people. There are additional things to consider before converting your house to a HMO, but this may lead to higher profit, as you collect rent form more tenants.

Keep track of your outgoings

If any bills are included with your tenancy agreement, using the cheapest provider is a simple way to make an instant saving. Utility rates change frequently, so check regularly to make sure you are getting the best deal. Decorating and repairs should also be done to a strict budget, and sourcing cheaper trades people to carry out maintenance and repairs will help to maximise your net rental yield.