Property rental yield is a snapshot of a property’s financial performance and an essential factor in assessing the potential of your real estate investment. When you know the yield, you get a clear picture of what your investment could bring in annually concerning the property’s cost. This is fundamental for comparing the attractiveness and profitability of different properties.
It’s essential to do your calculations and determine the potential yield that can be gained from your investment. A simple formula can be used to calculate the gross rental yield and determine if the property is a good investment.
A rental yield is calculated knowing the annual rental income of the property and the purchase price. You then need to divide the annual rental income by the property price and multiply that number by 100, which can be expressed as a percentage.
What is a Good Rental Yield?
A property rental yield is the annual return likely to be made on the property you have chosen to invest in.
A good yield or return on investment is between the 5-8% area.
A good yield will be able to cover the costs of running the property, including the mortgage, if needed to complete the purchase. A profit needs to be made so that if an emergency occurs, the funds are readily available to fix the problem. This also includes periods where the property may not be occupied. A 7% rental yield is considered an excellent yield on the property.
What is the average rental yield in the UK?
In the UK, the current average rental yield sits around 4.75%. Many higher-yield properties are in the Northern areas of the UK, where Yield Investing focuses our efforts.
Location is one of the decisive factors to generate the best yield. The Northern areas in the UK, including Manchester, Newcastle, Leeds, Middlesborough and Durham, dominate the top spots for higher rental yields. Investing in these areas presents a great opportunity to expand your investment portfolio.
City | Avg. Property Value (RightMove) | Avg. Rent PCM (Home.co.uk) | Avg. Annual Rent | Ave Gross Rental Yield % |
Newcastle upon Tyne | £206,264 | £1,105 | £13,260 | 6.42% |
Hartlepool | £129,000 | £625 | £7,500 | 5.81% |
Stoke-on-Trent | £170,282 | £885 | £10,620 | 6.23% |
Manchester | £285,493 | £1,479 | £17,748 | 6.21% |
Leeds | £263,332 | £1,344 | £16,128 | 6.12% |
Sunderland | £160,830 | £697 | £8,364 | 5.20% |
Middlesborough | £149,205 | £710 | £8,520 | 5.83% |
There are risks involved with any investment. Higher yields could come with higher risks as issues such as tenant quality and higher property management fees could arise. However, they could be reflective of an increase in demand.
What is the difference between gross and net rental yield?
Gross rental yield is the big picture before taking out the costs of owning and running a property. This gives investors a basic idea of the return on their investment without getting into the nitty-gritty of operational costs.
For example, to calculate gross rental yield if the monthly rental income is £900 and the cost of the property is £210,000:
£900 x 12 = £10,800 is the annual rental income
£10,800 / £210,000 = 0.051
0.051 x 100 = 5.14%
The rental yield is 5.14%
Net rental yield digs deeper by considering the expenses of property ownership. This includes maintenance costs, management fees, taxes, and other charges that affect the rental income. By subtracting these costs from the annual rental income before calculating the yield, investors get a clearer view of their actual earnings from the property, offering a more precise measure of profitability.
Suppose you’re looking into buying a property to rent to tenants. In that case, additional calculations and further research will need to be carried out to determine if the property is worthwhile.
Extras costs that might need to be considered are:
- Stamp duty = Around 0-12% of the property value, depending on circumstances
- Monthly letting agency fees = Up to 10% of your rental income or higher
- Average monthly mortgage payment = Depends on interest rates and property costs
- Maintenance fund = 1% of the property value in funds
The stamp duty on the property will only need to be paid once. However, the maintenance fund may need to be used regularly, which are factors that need to be considered that will affect your overall yield.
The driving factor in your investment is what you want to gain from it, which will also determine what you deem a good rental yield. Most buy-to-let investors are happy if their yield covers all the running costs, mortgage repayments, and fees with an income left over to build an emergency fund. Buy-to-let investors tend to rely on the property’s capital growth when they come to sell the property later, which is a long-term strategy that will require constant attention and budgeting.
If your goal is to make an extra income in a shorter-term plan, you need to generate a higher yield, enabling you to bring in a more significant amount of disposable income.
How to Generate the Highest Yield from Property Investment
Consider your Property Investment Options
A few types of property investments include buy-to-lets, houses of multiple occupants, social/affordable/assisted housing, and student accommodation.
Buy-to-let investments offer lower rental yields than commercial properties or other assets such as social housing, student letting and professional investments. These generate a higher yield as there can be multiple occupants if the property is large enough.
Buy-to-lets can generate good yields. However, students, multiple occupants and social/affordable/assisted housing tend to develop a much higher monthly yield.
There is a significant tenant demand for social/affordable/assisted living accommodation, which is reflected in the current social housing waitlists in the UK. This tends to offer much higher yields than the buy-to-let property market.
If you were to invest in a social housing property through Yield Investing, we offer an 8-9% yield on all of our properties. You also don’t need to worry about the property being vacant for a period of time or the running costs of the property, as that is all included in the investment. This can take a lot of stress and worry out of investing in property, and social housing investment helps build your investment property portfolio while making a positive social impact.
The property’s size, location, demand and level of finish will affect the potential yield on the above investments. How many bedrooms/occupants the house can accommodate will considerably affect the yield.
Consider the area
When looking to invest in property, a lot of investors immediately think of London and the surrounding areas. However, these areas have higher property prices, affecting the overall yield. It’s recommended to cast your net further wider and research other profitable areas in the UK.
The North East is currently one of the best areas for investment. Lower house prices and a high demand for affordable living make it the perfect area to invest in. These factors help to generate a higher yield from your investment.
When researching the area you want to invest in, we also recommend you consider the best type of investment for that area. For example, investing in a student rental wouldn’t be sensible if the location doesn’t offer higher education campuses.
You may choose to invest on your own in a certain area, or you may choose to invest with a company that takes care of all areas for you. Whichever route you take, ensure you have done your research.
Consider Property Renovation
The net return also depends on the expenditures that come with the property. You need to factor in additional costs into your budget, such as any renovations that might be required.
One way to increase the yield on a rental property is through renovation. It adds value to a property, increasing the monthly rental income and, therefore, increasing the gross yield.
A sizeable one-bedroom property, for example, could then be renovated and changed into a two-bedroom property. The rooms could be rented separately to students or as a professional house share, requiring a higher monthly rental payment than a one-bedroom property.
Adding additional rooms and renovating a property are big projects, but they provide a stronger return on investment. More minor improvements can also be carried out to increase the rental value and, in return, the yield, such as kitchen and bathroom upgrades and updating the property to a modern finish.
When you invest in a property with Yield Investing, we consider all the above for you. We take care of the property’s renovation and apply modern finishes. We also consider the layout needed to generate the highest yield and amend this where required. We take care of finding tenants for the property, work closely with a social housing provider and then provide these homes to the people who need them most.
It’s possible to take on a property renovation and complete each step yourself, from the kitchen upgrade to adding additional rooms. However, it’s time-consuming and costly. If you’re an investor looking for secure tenancy agreements and high yields of 8-10% net without having to put in the hard work, that’s where yield investing can help. Our investment properties transform redundant and rundown properties into suitable accommodations for social/affordable and assisted living tenants.
Investing in Social Housing with Yield Investing
The amount of people who need social housing in the UK is on the rise, and more and more people are living in poor conditions, in temporary housing, or they are taking on privately rented properties that they simply can’t afford.
Investing in social housing means investing in the long term, and if you’re seeking a high-yield investment, it’s perfect for you. This is a sector of housing that may be unique to investors but one that should be in everyone’s portfolio. Not only will you see a high yield on your investment, but you will also be helping to home some people who need it within the UK.
If you’re curious to explore social housing investments and how to invest purposefully to benefit society and your investment portfolio, contact our property advisors today to learn more about working with us.
