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How To Calculate Your Rental Yield

  19 Jul 2016

With so many things to consider when becoming a landlord, it is easy to see why some investors will overlook key elements to this process. Not everything that a landlord can contend themselves with is important or essential, but there are some things that a landlord must make themselves aware of before they invest in property. Calculating the rental yield of a property is an essential task and if you need guidance on this matter, here is how to calculate your rental yield:

Your rental yield is your expected Return On Investment (ROI) of your Buy To Let (BTL) property. The main aspects of your rental yield are your rental income, the initial cost of buying the property and costs associated with maintaining your investment. The rental yield is commonly worked out on an annual basis but as you are likely to have monthly rental income figures, many people calculate this monthly then multiply it by 12 to determine the annual figure. The rental yield is most commonly presented as a percentage.

The most common, and simplest, method for calculating your rental yield breaks down to your total rent minus your total running costs divided by the purchase price of your home. Some of the common costs involved with running a home include repair fees, maintenance work, insurance and mortgage payments. It is also important to remember that the total fee paid for your home doesn’t just relate to the purchase price of your property, it will also include all of your fees, including taxes and any legal fees associated with buying your property.

Many landlords have overlooked certain fees or charges in their calculations which will skew their figures. It may not sound like a big deal but when you are basing your decision on an incorrect rental yield, you may find that what seemed like an attractive purchase evolves into a costly mistake.

There are different ways of calculating yield, but in our case, we’re going to use the most common formula for BTL investors:

Monthly rental income – monthly costs divided by 12 divided Total cost of property multiply by 100 = Rental Yield in percentage form

You can see why many landlords and potential landlords focus or fixate on rental income, but this is just one factor in determining your rental yield, which is highlighted by the two examples below.

Example 1

  • Monthly rental income of £700
  • Monthly costs of £100
  • Total cost of property £150,000

This results in a monthly rental return of £600, which is an annual return of £7,200.

Diving £7,200 by £150,000 equals 0.048 and then multiplying it by 100 works out to be a rental yield of 4.8%

Example 2

  • Monthly rental income of £640
  • Monthly costs of £50
  • Total cost of property £130,000

This results in a monthly rental return of £590, which is an annual return of £7,080.

Diving £7,080 by £130,000 equals 0.054 and then multiplying it by 100 works out to be a rental yield of 5.4%

In the second example, the lower rental income doesn’t matter because the lower monthly running costs and the lower overall price of the property provide the landlord with a greater rental yield for their investment.


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