If you’ve decided to rent out a property, one thing you’ll need to know is how to calculate the buy to let yield.
In fact, even if you haven’t bought a property yet and are still trying to decide whether to buy to let or buy to sell, the yield is essential information.
It’s a simple, yet very important, calculation that will help estimate your expected return from a property over a year.
Once you know the expected yield, you can make a more informed decision about the future and your expected cashflow.
The Buy To Let Yield Calculation
When calculating the buy to let yield, you only need to know two figures – the expected annual rental income of the property, and the price you paid for it.
If you know these two figures, the formula to calculate it is simply:
(Annual Rental Income ÷ Purchase Price) x 100 = Yield %
In this formula, you do the sum in the brackets first, then multiply the answer by 100 to get the yield. For example, if you purchase a property for £150,000, and you expect to receive £9,000 a year from it in rental income, your calculation would look like this: (9,000 ÷ 150,000) x 100 = 6% Yield.
What Is Buy To Let Yield?
The buy to let yield is simply the rate of return you can expect to achieve on a property. It helps to visualise how quickly you will make a return on your investment. It will also help you decide whether to rent out or sell it on.
It’s expressed as a percentage of your original purchase price and is based on annual returns. Therefore, a property with a 10% yield would repay your original investment in 10 years time (10% x 10 = 100%). A property with a 5% yield would take twice as long (20 years) to repay your original investment (5% x 20 = 100%).
Any buy to let landlord should know how to calculate the buy to let yield, as it’s a vital figure for success in the rental business.
Gross Yield Vs Net Yield
The calculation above is a gross yield calculation and is the simplest and most common method for calculating it. It is based on very simplistic figures as it looks only at the price you paid and the total rental income, without taking into account any expenses.
For a more detailed calculation, you would need to work out the net yield of a property. With this, you would deduct any costs from the annual rental income before dividing it by the purchase price. Costs could include things such as letting agent fees, periods when the property is untenanted, maintenance and repair bills, and so on.
Net yield is difficult to calculate accurately in advance since many costs are unknown. It is therefore usually used to look at historic performance rather than to estimate future performance.
What Rental Yield To Aim For
Knowing how to calculate the buy to let yield is one thing, but what yield is a good yield? Largely, this will depend on how quickly you want or need to make back your money.
But generally speaking, everything between 6% and 8% is considered a good rental yield. But you might not be able to get this level of yield everywhere in the country.
In areas where house prices are the highest, such as London or the South East, it will be more difficult to reach these yields. On the other hand, regions where house prices are lower, you can expect a higher yield.
According to research, cities with a large student population are the best places for a high rental yield. So Liverpool, Nottingham or Sheffield are good places to buy a rental property.
So knowing how to calculate the buy to let yield is vital if you want to get it right.
Maximising Rental Yield
Once you know how to calculate the buy to let yield, you can look at maximising that yield. Given that the rental yield is important, any landlord should know how to maximise their buy to let yield.
There are quite a few things you can do, although some will involve buying the right property. Here are some tips to maximise your rental yield.
Chose The Right Location
As we have mentioned, in some areas in the country you’ll be able to achieve a higher yield. So one of the easiest things to do to maximise your rental yield is to buy in a location where you can expect a good yield from the outset.
This mostly means keeping away from expensive postcodes and areas, where house prices are likely to keep rising. Because while house prices will rise, rent prices tend to stay more stable.
The good news is that there will be postcodes and areas in most cities that can bring a good yield. But this is something you need to check before you buy.
Up-and-coming areas are good places to invest in a buy to let, because it’s likely that rental values will rise there, increasing your rental yield. And as we have already said, university cities are great locations for a great buy to let yield.
Another way location is important is what the area has on offer. Different types of tenants will want different things. If you choose an area with great schools, a green space and amenities close by, families will be attracted to your property.
Good transport links, cafés, bars and restaurants will attract young professionals. So deciding on who you want to attract as tenants should influence your decision where to buy.
Choose The Right Property
Another way to maximise your rental yield is to choose a property that doesn’t need much work, so you have to spend less money. If all you have to do is give the place a good clean and a lick of paint, your yield will be bigger.
However, these types of properties tend to be more expensive to start with, for this reason. So it’s a question of crunching the numbers to see if it’ll work for you. And knowing how to calculate the buy to let yield is the first step.
Keep Renovation Costs Down
To achieve a good rental yield, keeping the costs of the property down is important. Apart from the purchase price, you might also have to invest money in renovating the property. The more you spend on this, the lower your yield will be.
So it pays to carefully weigh up what work you want to carry out. While structural work, such as adding an extension or a loft conversion, can increase the rent amount, it can also be expensive.
What you do will also depend on the type of tenant you want to attract. The higher the spec, the more rent you can ask. However, this will only work if your target tenants will be able to afford this.
So it’s a balancing act of doing enough work to attract the right tenants but not too much so that the costs reduce your yield.
Either way, you want to make sure that you have an attractive property on offer. So newly painted walls, an updated bathroom and kitchen, new carpets, etc. can increase your yield.
Add More Space
If you have the budget, then extending the property to add more bedrooms is a great way to increase the rental yield. The more bedrooms a property has, the more rent you can ask.
An open-space living/kitchen/diner is on top of the list of many tenants, especially families. And most will be willing to pay more for it.
However, you have to be careful not to overspend. The cost of adding more rooms might be much higher than the additional yield you could get. It’s worth consulting a local letting agent to find out if extending your property would be worth it.
If not, you could look at reconfiguring the layout. Often, this is a more cost-effective way of adding more rooms or creating a large kitchen diner.
Knocking down a wall to open up the kitchen into a dining room will add value without the big price tag. And a large bedroom can be split into two to create an extra bedroom. Of course, you have to make sure the bedrooms aren’t too small afterwards, as this might put tenants off.
Use Every Inch Of Space
If extensions or other structural work to add more space is not in your budget or not possible, you can look at using the space that you have better.
Most tenants have a lot of stuff, so adequate storage is key. This can easily and cheaply be provided with inbuilt cupboards and storage.
For example, if you have a living room with a chimney breast, you could add custom-made shelves and cupboards on either side. This kind of space is often not used, so by adding storage, you can add value.
There are a lot of clever ideas on how to use every inch of space, just do your research and get creative.
Provide All The Mod Cons
Equip your rental property with all the amenities that today’s tenants want to make their lives easier. high-speed Wi-Fi, dishwasher, washing machine, drier, smart speaker, etc.
This will make your rental an attractive proposition that can demand higher rents. But what mod cons do you add?
Well, this will depend on your target tenant. Young professionals will want different things from a family. So before you can decide how to equip your rental, you have to decide who you want to live there.
Keep Your Fixed Costs Down
Your rental yield depends on how much you spend on the property. This includes fixed costs, such as mortgage payments, letting agent fees, insurance premiums, leasehold fees, etc.
By keeping these costs as low as possible, you can increase your rental yield. By shopping around you can find the best deals that will cost you less.
Become A Pet-Friendly Rental
Rental properties that accept pets are a rarity in the UK. So if you allow your tenants to keep pets, you will stand out from the crowd.
Pet owners and those who want to be will be willing to pay more for a property that allows pets. And because not many landlords are willing to have pets in their rentals, you will be able to ask a higher rent and still be an attractive option.
Yield Vs Capital Gain
The yield of a rental property should not be confused with the capital gain. Whereas knowing how to calculate buy to let yield will help you decide whether it is worth renting out a property, knowing the capital gain will help you decide if it is worth selling it.
The capital gain is simply your profit after you have sold it. So it’s your final sales price minus the price you paid for it and all other expenses incurred.
Most investors will look at both the potential capital gain and the expected yield, alongside several other factors, when deciding whether to sell or let an investment.
So, that’s how to calculate the buy to let yield on your rental property. In general, you’ll usually see higher yields on properties in cheaper areas, and lower ones on more expensive ones. However, it does depend on many factors, so it’s always worth getting the advice of a good estate agent before you make your final decision.