With its blend of chic shops, cafes and bars, set amongst handsome period buildings and open spaces Wimbledon Village is appealing to tenants and remains an area where landlords generate healthy returns.
This is despite the government introducing a 3% stamp duty surcharge on second homes, which pushes the tax payable on an £845,000 two-bed ground floor apartment in Burghley Road from £32,250 to £57,600.
When contemplating a property investment, or considering whether your existing investment is a good, one you need to calculate rental yields – the rental return as a percentage figure of the property purchase price.
What is rental yield?
Rental yield is the annual rental income as a percentage of the property purchase price. BTL investors use it to work out the level of return an investment property can be expected to deliver.
Rental yield v capital appreciation
Rental yield is not the only factor that determines whether a property is a good investment. Property investors also consider capital appreciation, that is the potential increase in the properties value. However, with increased uncertainty in the housing market many landlords and investors are looking for steady rental yields rather than significant capital appreciation.
How to calculate rental yields for UK properties
Calculating rental yield using this simple formula:
Rental yield = (Monthly rental income x 12) ÷ Property value
To calculate your buy-to-let investment’s rental yield, take the total rent received over a year. Assuming a two-bed property in Burghley Road has a rental value of £3000 per calendar month, that would work out to be £36,000.
Next, take the purchase price of the property (£845,000) and add that figure to its buying costs (£57,600 stamp duty plus £2,000 professional services fees). That gives you a total of £904,600
Now perform the following calculation: 36,000 ÷ 904,600 x 100 = 3.97%.
What if I have a mortgage?
The above calculation assumes the investment property was purchased without the need for a mortgage.
To work out your annual return or yield taking the property loan into account, the annual mortgage costs must be subtracted from the £36,000 received in rent.
Let’s assume the investor takes out an interest-only buy-to-let mortgage for 80% of the purchase cost (£676,000) at a rate of 3%. That would result in monthly payments of £1,689 or £20,268 per year.
Subtracting that figure from the annual rent receipts of £36,000 leaves a pre-tax profit of £15,732 per year.
To calculate the yield, take the deposit put down (£169,000) and add that figure to the purchase costs (£59,600). This gives a total of £228,600.
Now perform the following calculation: 15,732 ÷ 228,600 x 100 = 6.88%
What is a good rental yield?
A quick glance at the best savings rates available on easy access accounts, reveals no more than 1.3% is currently available. Not only that, but the value of property in Wimbledon Village is also likely to appreciate in value if the investment is held for 10 years or more.
Points to remember when calculating rental yield
It is wise to bear in mind, however, that a landlord’s true income from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been met.
Void periods – When calculating rental yields, bear in mind that it is unlikely that the property will be occupied for 12 months of the year. You might want to stress-test your calculations using 11 months of rental income.
Additional costs – The above rental yield calculations take into account purchase cost, stamp tax, solicitors fees and mortgage costs. However, you are likely to incur other costs both in buying and running your property. Home Buying Surveys, insurance, mortgage arrangement fees, redecorating and maintenance, as well as furniture and white goods, are just a few. You will get a more accurate rental yield figure if you include ALL costs when calculating the total investment amount.
Rent – If you are calculating yield on a property you are considering buying you will have to estimate the rent your prospective investment could achieve. You can research what other similar properties are asking, however, bear in mind that this is not necessarily the amount achieved.
Robert Holmes & Co has a database of buy-to-let investors who have expressed an interest in a wide range of property in and around Wimbledon Village. If you want to maximise the sale value of your property, contact us today and learn what it could be worth.