Generally speaking, a landlord’s main concern should be buying the property which provides the best ROI (Return On Investment). Perhaps an important aspect many novice landlords don’t pay enough attention to, as they’re often too busy focusing on superficial qualities. Don’t get me wrong, I totally get it. And of course, looks matter.
However, it’s imperative to remember why you’re buying a BTL property in the first place; it’s an investment to make money! That means buying a property that offers the best return should be the goal.
Trust me, if the figures stack up, you’ll love whatever piece of shit is filling up your bank account.
And how do we work out which rental property will offer the best return? We calculate the Rental Yield.
As a landlord, or more specifically, a new/upcoming landlord, have you ever been torn between multiple properties? I have. And so has John.
For example, John wants to be a landlord, so he’s on the hunt to buy a suitable property to rent out. 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?
If making money is John’s primary objective (which it almost certainly should be), then common sense dictates that the property with the highest rental yield should be the property in our cross-hair.
Table of contents:
- What is Rental Yield?
- How to Calculate Rental Yield (The Formula)
- What is a good Return Yield percentage?
- Rental Yield Calculator
- Best Rental Yields in UK
- How important is Rental Yield?
- Interested in buying a BTL and becoming a landlord?
What is Rental Yield?
Yield is a way of calculating the ROI on your BTL.
There are different ways of calculating yield, but in our case, we’re going to use the most common for BTL: the ‘rental yield’ is the total amount of rent minus the running costs (mortgage payments, insurance, repairs and maintenance etc.), divided by the total amount invested to purchase the property (that should include all fees, including tax and legal fees).
The higher the yield, the better.
How to Calculate Rental Yield (The Formula)
The formula:
mrr = monthly rental return
i = investment
Yield = mrr*12/i*100
Rental Yield example 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 example 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. However, it’s important to note that the yield can change over the duration of the investment, as house prices change.
What is a good Return Yield percentage?
It’s actually a subjective issue, which probably doesn’t help you out. Some consider anything about 5% a good yield, while others believe 8 is the magic number.
I personally believe 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 bang.
To make life easier (because that’s what I’m all about), you can use the calculator below to calculate your Rental Yield, whether it be for your current BTL, or a prospective investment…
Points to remember when calculating Rental Yield
While calculating the Rental Yield of a BTL property is relatively straight forward, there are a few points to consider:
- Void periods – ignoring void periods is a common mistake, and if you fall victim it can easily skew your calculations. When calculating the yield, bear in mind that it’s unlikely you will always have a occupied property for 12 months of the year, so the total income won’t always be 12 months x £Monthly rent. There maybe times where you will have void periods, whether it be in-between tenants or at the very beginning of your investment. So you may want to “stress-test” your calculations by using 11 months’ worth of rental income.
- Rent – If you’re in the midst of your research phase, and you don’t know how much rent your prospective investments can achieve, you can look on portals like Rightmove, Zoopla and Guntree to see what other similar properties in the same area are demanding. Alternatively, you could talk to a local letting agent. However, bear in mind, the “asking price” isn’t always the amount achieved.
- Total costs – when calculating your yield, it’s important to use the real figures to get the most accurate calculations. So when using the total investment amount, it should include ALL your costs, which may include the following:
- Cost of property
- Tenant acquisition
- Insurance
- Mortgage product/arrangement fee
- Solicitor fees
- Survey fees
- Any other legal fees
- Cost of redecorating/maintenance
- Running costs during void periods (e.g. council tax, utility bills)
- Costs of furniture/white goods
- Be wary of yield calculations – when you hear agents or developers talk of yields they can often sound incredibly attractive, and this is when you should start asking questions. They often make their calculations based on basic cost of the property and essentially ignoring all the costs associated with buying the property (as per the list mentioned above), which obviously skyrockets the yield and makes the deal seem sweeter than it actually is! Buyer beware!
Best Rental Yields in UK 2018/2019
Totallymoney has published data on the highest buy-to-let yields in Q4 2018; they analysed data from 580,000 properties across England, Scotland and Wales.
While these are only averages, and don’t account for ‘special cases’, which include high-yielding individual gems, it does give a good indication where the highest yielding areas are.
Location | Postcode | Average Rent (Monthly) | Average Asking Price | Rental Yield |
---|---|---|---|---|
Nottingham | NG1 | £1,525 | £152,631 | 11.99% |
Liverpool | L7 | £941 | £115,398 | 9.79% |
Cleveland | TS1 | £543 | £68,925 | 9.45% |
Liverpool | L1 | £923 | £118,754 | 9.33% |
Nottingham | NG7 | £1,187 | £160,269 | 8.89% |
North East | NE6 | £834 | £118,789 | 8.43% |
North East | NE1 | £1,095 | £161,035 | 8.16% |
Sheffield | S2 | £853 | £125,483 | 8.16% |
Southend-on-Sea | SS1 | £2,736 | £409,233 | 8.02% |
Bradford | BD1 | £439 | £65,889 | 8.00% |
Liverpool | L6 | £765 | £116,995 | 7.85% |
Cleveland | TS3 | £431 | £67,489 | 7.66% |
Liverpool | L5 | £668 | £104,893 | 7.64% |
Sunderland | SR1 | £567 | £90,347 | 7.53% |
Huddersfield | HD1 | £838 | £134,246 | 7.49% |
Liverpool | L3 | £836 | £134,803 | 7.44% |
Leeds | LS6 | £1,483 | £239,505 | 7.43% |
Manchester | M14 | £1,265 | £214,848 | 7.07% |
Doncaster | DN31 | £398 | £68,301 | 6.99% |
Preston | PR1 | £845 | £147,076 | 6.89% |
Manchester | M13 | £1,054 | £183,551 | 6.89% |
Cardiff | CF10 | £1,024 | £178,667 | 6.88% |
Sheffield | S1 | £727 | £127,297 | 6.85% |
Aberdeen | AB11 | £660 | £116,110 | 6.82% |
Liverpool | L2 | £854 | £150,663 | 6.80% |
How important is Rental Yield?
Haven’t you been being attention? It’s critical!
Essentially, you want a good yield to make your investment worthwhile, because not only will it put more cash in your pocket, but it will also be more resilient during economic downturns!
However, I do want to stress that the best rental properties to invest in strike a balance between yield, location, rental demand and capital growth (based on data)!
For example, if I had a choice between a property with a 8% rental yield in a shitty area with high crime rates and a property with a 7% rental yield in a good area, I’d go for the latter all day long.
Find the balance by taking into consideration all the essential factors!
So, what you got? What’s your Yield?
Interested in buying a BTL and becoming a landlord?
I would be remiss to check out of here without pointing all wannabe landlords towards my ‘Ultimate Guide For New & First-Time Landlords‘. Long story short, it’s a 100+ page blueprint on how to be a landlord, covering A – Z, including tips, advice, legal crap, how to find and manage tenants etc. It’s all there. Plus more.
It’s free to download, so go ahead and grab your copy from here. If you want.
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.
Welcome to posting, Colin, and thank you for kind remarks. I, too, find posting nerve-racking but there are a few subjects that just get me going when I should probably keep my mouth shut.
First, I am absolutely not qualified to give you or anyone else investment advice. I would be wary of anyone who says they are!
Then, I do feel able to say something about risk and reward ("actual return(yield)". As a general rule, reward is proportional to risk. Ask any bookmaker! In property, the best indicator of risk that I know of is Nationwide's data on average real house prices since 1975. Please go here and study it carefully: http://www.housepricecrash.co.uk/indices-nationwide-national-inflation.php
Any idea that property is risk-free is nonsense. On average, average UK house prices rise in real terms about 3%/year, but average house prices fell in just less than half the 40 years of the graph! How do I address this risk? I have a small investment in the shares of one of the UK's largest property companies (let's call it ABC). Over the last five years ABC shares have risen by about 30%, or about 5%/year in real terms: but in 2015 they went absolutely nowhere! The present yield is about 3½%.
It'sometimes said that risk and return are composed of two separate factors: the worrying time and the waiting time. In other words, will the investment pay off at all, and how long will it take for it to pay off? In BTL, it's sufficient that tenants don't pay the rent, trash the property, take you to Court and all those worries, to kill the investment return stone dead. And how long can you wait to get your money back? Property is not a liquid asset: it may be subject to losses and it's not always easy to sell quickly. ABC shares are subject to losses but can be sold in minutes.
With respect to reward, or return/yield, you simply must have a criterion by which to judge your proposed investments. I assume you're a sterling investor -- not a US$ or € investor -- so your best risk-free criterion is the yield on Gilts. No matter what one thinks of the UK government, the Treasury has never defaulted on its debt. The UK yield curve for today is here http://markets.ft.com/research/Markets/Bonds. Study it carefully and often: it changes every minute of every working day. You can see that the risk-free yield is about 2% on 10-year Gilts and about 3% on 30-year Gilts. The 1% difference in yield is mainly waiting time reward.
To compensate for the risk of investing in something other than risk-free Gilts, you must estimate the premium you wish the investment to earn. Only you can answer that question for yourself. From memory and to give you some clues, the long-term (100-year) annual return on property averages at about 8%. Over the last five years the total return on ABC shares has averaged about 9%/year: about 5.5% in share value and about 3.5% in annual dividend yield.
All in all, Colin, I would like to see you fix a BTL premium of 500-600 basis points above the 10-30-year Gilt yield. so somewhere between 7% and 9% per year. On average you can assume a real price increase of about 3%/year -- more in London but less in South Wales -- and a rental yield of between 4% and 6%. If you could do that, you would be doing well but that doesn't mean it's easy. Happy New Year!