What's a good rental yield?
Before you start investing in property, it’s a good idea to do your sums to work out just how much you need to charge for rent to make the investment worthwhile.
Obviously, with the advent of property websites, it’s now even easier to find out how much rent is charged in like-for-like properties. Bear in mind that if you have to charge above-the-odds in rent to make a return on your investment, the property in question probably isn’t the one for you.
So, what is a good rental yield and how can you achieve this? We’re on hand with all the property investment advice you may need.
What is a rental yield?
Put simply, a rental yield is the amount of rent you can expect to receive from the property in question in any given year. The figure is always offered as a percentage, worked out by dividing your annual rental income with your initial investment.
How to work out rental yield?
To work out the yield on a rental property the old-fashioned way, you’ll need to divide the annual rental income by the price of the property and then multiply this by 100.
So, a property that you bought for £200,000, that you charge £10,000 per year in rent for would give you a rental yield of 5%.
A far simpler way to work this out would be to use our online rental yield calculator.
What is a good rental yield?
At the very least, your rental income needs to cover the running costs of the property, including any mortgage repayments and any lettings expenditure that you’d otherwise incur. Failure to plan accordingly for this would lead to you having to dip into your contingency fund more often than you’d like to.
Most property investors try to achieve a rental yield that’s around the 5-8% mark. Ideally, this should cover all of the necessary expenses while allowing you to make a conservative return from your investment.
What are the average rental yields in the UK?
Obviously, rental yields differ from region to region. Currently, the best rental yields in the UK can be found in Nottingham – which achieves an average rental yield of up to 12%. However, elsewhere, it’s largely University towns such as Canterbury which offer the savviest return on your investment. In 2018, Canterbury was one of the most lucrative places to own property in Kent, achieving on average rental yields well above 5%.
So, why are university towns so lucrative for landlords? The answer is simple: student lettings.
Are student lettings a good investment?
Yes and no. You may achieve some of the best rental yields by renting to students but, for a long-term investment, you may want to consider your options. Student lettings are likely to incur a higher turnover – perhaps even annually – so you’ll have to factor in advertising costs, letting fees and potential void periods into your initial investment.
As well as this, it’s likely that you’ll need to allocate more funds towards wear and tear since a young student is less likely to care for your property as a long-term tenant would. You’ll also need to think about your resale value – how much will you have to spend on refurbishments to achieve an asking price that’s higher than what you paid?
Recap: What’s a good rental yield?
- Aim for between 5-8% rental yield on your investment.
- Work this out by dividing your annual rental income by your total investment.
- Student towns achieve the highest rental yields but may incur other costs.
For more advice about rental yields, speak to a member of our buy-to-let team.