A rental yield calculator enables you to compute the net and gross rental yields for your property or other lettings business. Evaluating your rental yield ensures you know whether your property is a profitable investment or not. It also helps you make an informative decision when you want to acquire a buy-to-let mortgage.
What is Rental Yield?
Rental yield is the amount of money you earn from an investment property. The difference between the entire costs and revenue received from your rented property is the rental yield, and it is usually demonstrated in percentage form.
Rental yield assists investors and landlords in ascertaining their portfolios and property investments’ value. It also helps you know if you can earn more if you invest in a different property. Various factors influence rental yield. These include property prices, demand growth, the fluctuating housing market, and interest rates.
For instance, you can have a property with a good rental yield, but you don’t get enough tenants, meaning the demand is low. Besides, the rental yield can be good, and there is no property price growth at all.
How to Compute Rental Yield
Rental yields fall under net rental yield and gross rental yield. When calculating the net rental yield, you have to take into account all expenses of the property. While on the other hand, gross rental yield doesn’t.
The ideal method of computing rental yield is using the net rental yield since expenses do not usually match the revenue generated in various properties.
● Gross rental yield calculation
Evaluating the gross rental yield is very simple. You only have to take the total property’s annual income, divide it with the property value, and multiply it by 100. Here is the formula:
Gross Rental Yield = Annual Rent
Let us say that your monthly rental income is £1200. So, your total annual rental income will be:
£1200×12=£14400. We assume you purchased the property for £220000. Therefore, your gross rental yield will be:
Gross Rental Yield: (£14400÷£220000) x 100 = 6.55%.
● Net rental yield calculations
The formula for calculating net rental yield is a bit different from the gross rental yield. Here you have to deduct all the expenses like repairs, taxes, vacancy costs, insurance, and other property maintenance costs. But you don’t subtract all expenses.
For instance, you cannot include debt expenses such as interests and mortgage repayments since they are unrelated to the property but the investor’s finances. However, you can include these expenses if they give you a better comparison way of viable investments.
For you to calculate net rental yield, you must have four values: property value, annual rent, annual expenses, and vacancy rate. The vacancy rate is the amount of time when the property has no tenant, usually in percentage form.
To compute the vacancy rate, your need to take the expected number of weeks or months the house will be vacant in a year and divide them by the number of weeks or months in a year.
Sum up all expected expenses to get total annual expenses. To compute your net rental yield, you must deduct total annual expenses from total annual rent income while considering the vacancy rate and dividing the amount you get by the property’s value.
Net Rental Yield = (Total Annual Rent x (1 – Vacancy Rate) – Total Annual Expenses.
Let’s assume that you collect an annual rent income of £28000 every year, and you pay £8000 for total expenses. The vacancy rate is 12%, and your property value is £480000.
Net rental income will be: (£28000 x (1 – 0.12) – £8000 ÷ £480000 x 100 = 3.47%.
What is a Good Rental Yield?
There is no single approach to defining a good rental yield since the percentage will vary depending on various factors such as location or residential or commercial property. But the thumb rule is that a gross rental yield of over 5% is good. Over 8%, the yield is very good, and anything above 10% is excellent.
Besides, a good net rental yield should allow investors to make reasonable income after deducting all property expenses. If you want to buy a new property, it is advisable to invest in an area where there is high capital growth or high demand for rentals.
Do not invest in property that cannot cover its mortgage payments plus any other cost that comes with possessing a property. This can lead to low return on investment and, eventually, poor rental yield.
What Can You Do to Maximize Your Rental Yield?
Other than varying mortgage interest rates and changing property market value, other outside factors can make your rental yield vary. However, the following are some of the things you can do to ensure you optimize your rental yield:
● Adjusting rent
You increase the rent based on the tenancy agreement if it’s below the market rate. On the other hand, you can decrease the rent if it is too high than the property value. Charging a high amount of money and the property’s value is low can make your property stay for an extended period without tenants.
● Think about a house in multiple occupations (HMO)
Private landlords mainly own HMOs, and many people rent them. You need to consider a lot of practicalities before you convert your properties into HMOs. But this option is more profitable since you will get rent from multiple tenants.
● Evaluate your outgoings
Many landlords and investors overlook their standard property outgoings. But little do they know that they can save a lot of money by simply changing a few things. Sourcing cheap labour for repairs and maintenance and re-mortgaging for a good deal are some of the things you can do to maximize your net rental yield.
Now you know the importance of a rental yield calculator and how it calculates rental yields. A rental yield calculator helps you compute net rental yield and gross rental yield for your property. It is the dream of every landlord or investor to get a good rental return upon investment on properties.
Gross rental yield helps mortgage lenders and estate agents to determine how affordable the buy-to-let properties are. It is also useful when comparing various investments.