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.

Rental Yield Calculator

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

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7 Comments - join the conversation...

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 1

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 2

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

jez2010-11-05 00:21:02 Superb yeild of 13% on repo flat i paid 40k for! 4

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

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

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. 7

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