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). Perhaps an important aspect many landlords don’t pay enough attention to, as they’re too busy focusing on the superficials. While that’s not a terrible thing, it’s important to remember why you’re buying the property in the first place- for an investment; to make money! So you want a property that will make you the most income! So how do you work that out?
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?
This when is calculating the “rental yield” will help.
What is rental yield?
Yield is a way of calculating the ROI on your BTL; it uses the rental income over the initial cost of buying the property, and is usually expressed as a percentage.
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.
Calculating rental yield
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
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?
Well, 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 calculator below to calculate your yield…
Points to remember
While calculating the 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
- 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!
Top 2018/2019 Buy-to-Let Hotspots by Rental Yield in the UK
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.
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