Calculating The Rental Yield To Find The Wiser Investment

As a landlord, or a wanna-be landlord, have you ever been torn between multiple properties? A landlord’s main concern should be buying the property which will get the best return. Because let’s face it, it’s all about the money!

Example scenerio
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.

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 has the better return.

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

12 Comments - join the conversation...

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dvdfrost2009-11-30 14:58:09

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

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Matt2010-01-05 10:46:56

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

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adam2010-09-02 13:28:38

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

3
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jez2010-11-05 00:21:02

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

4
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Jonathan Wood2010-11-17 23:52:04

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
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Mike2011-01-14 12:34:10

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
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Peter whiteman2011-11-19 14:57:31

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.

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chris J2012-06-29 17:18:40

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.

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Philip2012-11-25 10:28:13

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?

--

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Griffo2012-12-14 09:21:02

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!

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Pete2014-02-02 23:36:45

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).

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david G2014-03-23 17:05:04

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

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