A good way to track if your property is making money is by understanding and calculating the rental yield of the property. If you don’t know how to work out property yield, this article will teach you how.
Rental yield is the difference between the rental income you receive from your property compared to the overall costs of your property investment. It’s usually expressed as a percentage, with a higher percentage signifying a greater cash flow and higher return on investment.
If your property isn’t making much money, the percentage will be lower.
Gross rental yield - This calculation does not consider any expenses spent on the property.
Net rental yield - This calculation takes into account expenses such as mortgage payments, maintenance, and landlord insurance. It’s a more realistic portrayal of rental yield and what you can expect to spend.
Calculating a property’s rental yield informs landlords and property investors of the property's value. This can influence what properties you choose to invest in, and how much rent you will charge to be able to produce a good rental yield from them.
Calculate the annual rent income of the property by multiplying the monthly rental income by 12.
Then, to calculate the gross rental yield of a property, take the annual rental income and divide it by the property value. Multiply the answer by 100 to find the percentage. This is the property’s gross rental yield.
Rental income ÷ property value x 100 = gross rental yield
Calculating the net rental yield is slightly different because it factors in annual expenses.
The calculation is the same, you just need to subtract the property expenses from the annual rent income.
Rental income – property costs ÷ property value x 100 = net rental yield
It makes sense for the highest percentage to be the best rental yield. However, high rental yields change as the property market fluctuates. In places with high property prices, such as London, you can expect lower rental yields. But, in places where demand for properties is strong but the property prices are lower, the rental yields will be stronger.
An average gross rental yield can be around 5-8%, and this is what landlords should be aiming for. The UK’s average rental yield is around 3.5%.
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Also see our article, 'Why checking and signing the inventory is crucial'