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!
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
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
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…
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)|
|Kingston upon Hull||19.02%||£69,519||£450||£5,400||7.77%|
|Brighton and Hove||28.04%||£229,622||£1,049||£12,588||5.48%|
|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%|
|Isles of Scilly||20.63%||£180,227||£654||£7848||4.35%|
|Richmond upon Thames||20.55%||£485,496||£1,647||£19,764||4.07%|
|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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