What is a good rental yield?
As every property investor will tell you, it’s always a good idea to work out how much you need to charge for rent to make your buy-to-let property worthwhile.
In the age of property websites, finding out how much rent is charged in like-for-like properties nearby is only ever a click away. So, if you have to charge extortionate rent to make a return on your investment, the property that you’ve shortlisted probably isn’t the one for you.
So, what is a good rental yield and how can you establish this? We’re on hand with all the property investment advice you should need.
What is a rental yield?
In a nutshell, a rental yield is the value of the rent you can expect to receive from your property in a year. Rental yield is always a percentage that’s calculated by dividing the annual rental income by your initial investment.
How to work out rental yield?
To calculate the yield on a rental property, you’ll need to divide the annual rental income by the price of the property and then multiply this by 100.
So, if your property was bought for £200,000, and you charge £10,000 per year in rent for this, you’d have a rental yield of 5%.
A much easier way to work out rental yield would be to 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. This includes mortgage repayment, wear and tear and any other lettings expenditure that you’d otherwise incur. Unless you plan for this, you may find yourself having to dip into your contingency fund more often than you should.
So, what is a good yield? Most savvy property investors aim for a rental yield that’s around the 5-8% mark. This should cover all of the necessary expenses while allowing you to make a reasonable return on your investment.
What are the average rental yields in the UK?
Yields fluctuate from region to region. Currently, the best rental yields in the UK are in Nottingham – which achieves an average rental yield of up to 12%. However, elsewhere, it’s largely University towns such as Brighton which offer the greatest return on your investment. In 2018, Brighton was one of the most lucrative places to own property in Sussex, achieving average rental yields well above 5%.
So, why are university towns so profitable for landlords? The answer is simple: student lettings.
Are student lettings a good investment?
Okay, so you may achieve some of the best rental yields by renting to students but, for a long-term investment, you may want to think about your options.
Bear in mind that student lettings are likely to incur a high turnover of tenants – perhaps even annually – so you’ll have to factor in letting fees, advertising costs and potential void periods into your investment.
You’ll also probably need to allocate more funds towards repairs since a young student is less likely to care for your property as well as a long-term tenant would. Bear in mind that your resale value could take a hit too – how much will you have to allocate for refurbishments to achieve the asking price you desire?
Recap: What’s a good rental yield?
• Anywhere between 5-8% is a good rental yield.
• Work out your rental yield by dividing your annual rental income by your total investment – or use a yield calculator.
• Student lettings may achieve the highest rental yields but will incur other costs.
For more advice about rental yields, speak to a member of our buy-to-let team.