Calculating The Rental Yield To Find The Best Investment

As a landlord, or more specifically, perhaps a new/upcoming landlord, have you ever been torn between multiple properties? A landlord’s main concern should be buying the property which will offers the best ROI (Return On Investment). Let’s face it, it’s all about the money!

Example scenario
John wants to be a landlord, so he’s on the hunt to buy a property. John has seen 2 properties he likes. Property 1 costs 150,000 with a potential rental return of £600pcm. Property 2 costs £180,000 with a potential rental return of £775pcm. Which is the better buy?

The formula to work this out is quite simple. It basically boils down to “rental yield”

What is rental yield?

Rental yield is the amount of money a landlord receives in rent over one year, shown as a percentage of the amount of money invested in the property. There are different ways of calculating rental yield, but for the sake ease, I’m going to use one of the most common formulas in my examples.

The higher the yield, the better.

Calculating rental yield

The formula:
mrr = monthly rental return
i = investment

Yield = mrr*12/i*100

Rental yield for Property 1

Monthly rental return = £600
Investment = £150,000

£600 * 12 = £7,200
£7,200 / £150,000 = 0.048
0.048 * 100 = 4.8 % yield

Rental yield for Property 2

Monthly rental return = £775
Investment = £180,000

£775 * 12 = £9,300
£9,300 / £180,000 = 0.0516
0.0516 * 100 = 5.16 % yield

Conclusion

Although property 1 costs less to buy, property 2 offers the better ROI.

What is a good return yield percentage?

Will, it’s actually a subjective issue. I personally think any property which has a return yield of 7%+ is extremely good. I certainly wouldn’t put my nose up at a property which generates that kind of yield.

To make life easier (because that’s what I’m all about), you can use the yield calculator below…

Rental Yield Calculator
Rent per month (e.g £750)
House price (e.g £150000)
Rental Yield
Top 50 Buy-to-Let Hotspots by Rental Yield in England & Wales

HSBC has released a report showing the average rental yields for the top Buy-to-Let hotspots of England and Wales based on data from the Office of National Statistics (ONS) and Land Registry.

While these are only averages, and don’t account for ‘special cases’, which include high-yielding gems, it does give a good indication where the highest yielding areas are.

The following data was published on the 30th May, 2014.

Location Percentage of Rental Housing Stock Average House Price Average Rent (Monthly) Average Rent (Annual) Rental Yield (gross)
Southampton 23.42% £138,311 £901 £10,812 7.82%
Blackpool 24.16% £75,943 £494 £5,928 7.81%
Kingston upon Hull 19.02% £69,519 £450 £5,400 7.77%
Manchester 26.85% £102,631 £650 £7,800 7.60%
Nottingham 21.64% £83,313 £524 £6,288 7.55%
Coventry 19.02% £104,970 £624 £7,488 7.13%
Slough 23.07% £171,581 £975 £11,700 6.82%
Oxford 26.11% £244,893 £1,375 £16,500 6.74%
Liverpool 21.75% £91,012 £498 £5,976 6.57%
Portsmouth 22.28% £141,971 £775 £9,300 6.55%
Cardiff 20.32% £140,882 £750 9000 6.39%
Cambridge 23.91% £179,699 £949 £11,388 6.34%
Southwark 22.22% £401,405 £2,058 £24,696 6.15%
Luton 21.27% £127,473 £650 £7,800 6.12%
Newham 32.62% £229,141 £1,126 £13,512 5.90%
Leicester 21.28% £112,226 £550 £6,600 5.88%
Bournemouth 28.21% £170,493 £825 £9,900 5.81%
Enfield 21.18% £261,163 £1,200 £14,400 5.51%
Brighton and Hove 28.04% £229,622 £1,049 £12,588 5.48%
Brent 28.82% £337,723 £1,517 £18,204 5.39%
Forest Heath 21.80% £179,699 £795 £9,540 5.31%
Torbay 21.43% £139,168 £598 £7,176 5.16%
Southend-on-Sea 20.72% £152,171 £650 £7,800 5.13%
Watford 18.89% £240,239 £997 £11,964 4.98%
Bristol, City of 22.11% £169,425 £695 £8,340 4.92%
Kingston upon Thames 21.04% £333,122 £1,363 £16,356 4.91%
Reading 24.68% £196,309 £795 £9,540 4.86%
Hounslow 22.23% £285,927 £1,148 £13776 4.82%
Wandsworth 30.02% £428,987 £1,694 £20,328 4.74%
Lewisham 22.97% £283,031 £1,101 £13,212 4.67%
Shepway 20.17% £181,399 £695 £8,340 4.60%
Tower Hamlets 30.84% £364,296 £1,387 £16,644 4.57%
Eastbourne 21.65% £177,408 £675 £8,100 4.57%
Harrow 20.37% £306,381 £1,148 £13,776 4.50%
Croydon 19.83% £254,591 £949 £11,388 4.47%
Exeter 19.56% £187,680 £693 £8,316 4.43%
Isles of Scilly 20.63% £180,227 £654 £7848 4.35%
Lincoln 19.36% £119,076 £429 £5,148 4.32%
Redbridge 21.63% £292,459 £1,049 £12,588 4.30%
Cheltenham 20.15% £170,573 £598 £7,176 4.21%
Ipswich 18.75% £153,163 £524 £6,288 4.11%
Richmond upon Thames 20.55% £485,496 £1,647 £19,764 4.07%
Westminster 37.56% £767,112 £2,578 £30,936 4.03%
Norwich 20.10% £179,699 £598 £7,176 3.99%
Camden 30.46% £646,043 £2,145 £25,740 3.98%
Hastings 27.19% £177,408 £550 £6,600 3.72%
Haringey 30.33% £372,278 £1,148 £13,776 3.70%
Thanet 21.96% £181,399 £524 £6,288 3.47%
Hammersmith and Fulham 30.05% £593,787 £1,690 £20,280 3.42%
Kensington and Chelsea 33.97% £1,090,943 £3,033 £36,396 3.34%

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16 Comments- join the conversation...

Guest Avatar
dvdfrost 30th November, 2009 @ 14:58

Great calculator!
so i have a yield of 9.615
but no one will give me a remortgage!!!!
God bless the banks

1
Guest Avatar
Matt 5th January, 2010 @ 10:46

Hi there,

Thanks for the very useful tool

As many landlords (including myself) will not be buying properties with 100% cash, how do you incorporate mortgage costs when deciding yield?

Do you subtract your mortage service costs from the rental income?

And how do you reflect the difference between interest only and repayment? Do I still need to calculate some form of cost for a repayment vehicle if I use interest only?

Many thanks

Matt

2
Guest Avatar
adam 2nd September, 2010 @ 13:28

Is there any way to work the house price out, having been given the rental yield? Perhaps through some kind of inverse?

3
Guest Avatar
jez 5th November, 2010 @ 00:21

Superb yeild of 13% on repo flat i paid 40k for!

4
Guest Avatar
Jonathan Wood 17th November, 2010 @ 23:52

Interesting approach to evaluating rental properties. Normally, I use a tool like http://www.realestateprofitcalc.com , which focuses on the monthly cash flow. While your calculator doesn't delve into some of the finer calculations, it is certainly a quick and easy way to compare rental properties.

Thanks.

5
Guest Avatar
Mike 14th January, 2011 @ 12:34

Of course, in computing a true yield figure, you would ideally cater for (in addition to the cost of the house)

1) costs of finance setup - booking fee, arrangement fee, valuation, brokers fees
2) legal fees, searches
3) costs of any refurbishment (including your own time)

From the monthly rental return, you should remove

1) costs of finance - repayments/interest
2) costs of compliance - safety checks, repairs, insurances
3) allowance for void periods between lettings.
4) a realistic percentage if your expected mrr is a figure supplied by your property's vendor!
5) Service costs if applicable
6) Management fees/finders fees if using an agency. Advertising costs if not.
7) Return on your cash if you'd invested it in an isa/other opportunity instead - IE the cost of the money you invested.

Don't these costs mount up quickly? I probably forgot a few too!

6
Guest Avatar
Peter whiteman 19th November, 2011 @ 14:57

This is a quick guide to yield which is helpful. But do remember as Mike is making in his post, you need to consider both gross and net yield, could you provide both the gross calculator and a net yield calculator, giving you the ability to put any cost for maintaining the property, landlord insurance etc, which when subtracted give you your net yield. For me this is the real yield to work against.

7
Guest Avatar
chris J 29th June, 2012 @ 17:18

Not only does Mike address very important points here are a few others:

Location
Location
Location

The absolute net rent is more appropriate number to use to get to your net yield but where the property is located can also affect the yield. In other words just because one property generates a higher yield it does necessarily translate into a wiser investment. I have seen properties in certain locations hardly appreciate in a 10 year period where others in prime location triple in price during the said period. You might also need to compare locations that have future strategic value not yet reflected in the price.

8
Guest Avatar
Philip 25th November, 2012 @ 10:28

If someone buys let's say a 2 bedroom apartment for £150k as cash purchase and rents it for 9,600 PA, the gross yield is 6.4%. If the rent goes up to £12,000 PA in 5 years time, do you calculate the yield on the initial investment i.e £150k, or its market value?

--

9
Guest Avatar
Griffo 14th December, 2012 @ 09:21

Interesting.

But why don't you work out the potential rental income based solely on the investment value first in order to calculate the profitability of property. Yield does not take into account the market competitiveness. You may have a property vacant for months if you expect a high yields and before you know it your property breaks even or even worse goes negative! Work out your properties minimum rental return first including a minimal safe guard profit after all your fees and expenses then asses if the market can afford this minimal rent/lease. If the market cannot afford it then you already know that market is not for you.

Think of it like a business. A good business makes profit.

Good luck!

10
Guest Avatar
Pete 2nd February, 2014 @ 23:36

Do you know of any tools that give the yields in different areas of the UK? I could only find one and it's not free (yieldcheck.com).

11
Guest Avatar
david G 23rd March, 2014 @ 17:05

should it not be the amount invested not house price? The property may be valued at £100k but you have only invested £20K ( 80% LTV) so your return is calculated on rent minus cost(letting agent fee, mortgage, etc.) against a £20k investment.

12
Guest Avatar
graham 12th June, 2014 @ 10:26

I bought my one bedroom flat in 1998 for £43,000 it is now worth £ 145,000 if i calculate the rental yield on £145000 it is 5-57% but on £45000 the percentage is much greater ,just to let you know i often visit your sight for info as i am a virgin landlord have employed an agent for the first year will see how things go ,thanks for all the info and the sense of humor keep it up .well you know what i mean .

13
Guest Avatar
Susie Gillespie 19th July, 2014 @ 23:03

Really like the site - info very useful...
thank you.

14
Guest Avatar
Audrey Stevens 29th August, 2014 @ 15:49

I have a commercial property for sale that i have already leased to a very well known company, has a 10 yr renewable lease option, and full insuring & maintenance contract, but do not know how to find a genuine investor. Also own a large adjoining property, by separate negotiation. Would want a cash buyer for both though, so how do i find one ??

15
Guest Avatar
Paul C 19th October, 2014 @ 16:00

Hi all,

Great web site. I'm a new landlord who has just let my first house and in the process of buying my second.

I've purchased both on a LTV 75%, and have been working out my yield on my investment of 25% not the full 100%.

16

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