With its blend of chic shops, cafes and bars, set amongst handsome period buildings and open spaces, Wimbledon Village appeals to tenants and remains an area where landlords generate healthy returns.
When contemplating a property investment, or considering whether your existing investment is a good one, you need to calculate rental yield.
Here we explain the meaning of rental yield, how to calculate it and what is considered a good rental yield.
What is rental yield?
Rental yield is the annual rental income as a percentage of the property purchase price. BTL investors use it to determine 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, which 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
Calculate 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:
- First, 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. The formula needs to be tweaked slightly to work out your annual return or yield taking the property loan into account.
Rental yield = (Monthly rental income x 12 – Annual mortgage costs) ÷ Investment
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 the mortgage interest payments from the annual rent of £36,000 leaves a profit of £15,732 per year.
- Take the deposit put down (£169,000) and add that figure to the purchase costs (£59,600). This gives a total investment of £228,600.
- Now perform the following calculation: 15,732 ÷ 228,600 x 100 = 6.88%
What is a good rental yield?
Between 5-8% is a good rental yield to aim for. With interest rates even on the best bank deposits historically low, even modest yields compare favourably. Not only that, but the value of property in Wimbledon Village is also likely to appreciate if the investment is held for ten years or more.
Points to remember when calculating rental yield
However, it is wise to remember that a landlord’s actual 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 consider purchase cost, stamp duty 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 the asking rent of similar properties on Zoopla and Rightmove or ask a local letting agent for advice. However, bear in mind that this is not necessarily the amount you will achieve.
What is the difference between gross and net rental yield?
Gross rental yield is the return you can expect before expenses. This figure is helpful because it allows property investors to compare buy-to-let investments against each other easily. Mortgage providers also use gross rental yield to assess the affordability of buy-to-let mortgages as the specific costs of owning the property are not yet known.
Net rental yield considers the costs associated with running and managing the residential investment. These costs may include:
- Letting agent fees
- Maintenance costs
- Running costs during void periods (council tax and utility bills)
- Cost of furniture and white goods
Calculating net rental yield gives a more realistic comparison against non-property investments that don’t carry such costs.
The difference between gross and net rental yield is usually between 1-2%.
We can help
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.