Rental yield is a metric used to determine the amount of money that a rental property will bring in every year. In order to find the rental yield, an investor has to multiply monthly rent by the number of tenants in a property who are paying rent at any time. There are two primary kinds of rental yield. Gross rental yield simply considers the amount of money coming in. It is connected entirely to the people who pay rent and the positive numbers in a ledger book. Gross rental yield is only helpful as a benchmark and should not be used to determine when to buy an investment property.
A much more helpful metric for purchasing a rental property like is the net rental yield. The net rental yield is the yield for the property minus the multitude of the expenses that come along with owning a rental property. These expenses include the mortgage payment, average cost of repairs, and an average of the amount of time that units remain vacant. Mortgage payments are an automatic part of an individual’s investment that can sometimes be projected years in advance.
Average repair costs can fluctuate but are sometimes connected to the age of a building or its location near areas with high crime rates or bodies of water. Vacancies are also connected to both internal and external factors. Rental yields are essential in determining your exit strategy, like buying the property for a set amount of money, renting it for several years, and then selling that property at a profit.
Investors bring in income from rent and from eventually selling the property. Yield helps a buy to let investor find out how much money they are going to make in between buying and selling a property. Knowing this information is essential for knowing whether or not you will have to sell a property early to cut your losses or hold on through a number of vacancies.
Example Calculation of Rental Return
Buy to Let property monthly rental: £450
Yearly rental income: £5,400
Purchased for: £65,000
Refurbishment costs: £5,000
Rental Yield: 7.71%
Typically a good rental yield should be around 8% and above.
Factors to Consider
Rental yield is of course helpful in determining whether to rent or sell a property. But it should not be the end of your research into a particular areas property market. A number of other factors should also be taken into consideration. One of these is the capital growth of a property. Capital growth is the expectation of the increase or decrease in a property’s worth over time. Capital growth is essential to the sale that will occur when an individual decides that he or she does not want to rent a particular property anymore.
If capital growth is particularly high, an individual may be able to put up with a low rental yield for an extended period of time. Lower capital growth means that an individual must make as much money as possible from their tenants and may sell if that money is not coming in. There is also the need for cheap, stable financing.
Investors have to negotiate with banks and other lenders in order to receive the capital required to make such a purchase in most instances. Interest rates and the relationship that investors have with a bank both ensure that a rental yield for property can be placed in its proper context. Other factors that investors should consider are local regulations, a company’s brand, and the original asking price for a property.
Investors should not limit themselves to a particular property or a small geographic area. An investor needs to understand their greater property market and the neighbourhoods that they might buy properties in before even considering investment.
You need to look at the time commitment necessary for investment and the capital expenditures also required. There is also the need for discussions with local estate agents and financial lenders.
Understanding rental yield is your first step as a new buy to let investor followed by research.