It’s easy to calculate the rental yield for your property. Firstly find your annual rental income amount. Then divide this by the property value. Finally multiply the figure by 100 to get the percentage.
For example, you paid £100,000 for a flat and you received £200 a week in rent. This would make your annual rent £10,400.
£10,400 / £100,000 = 0.104. Multiply by 100 = 10.4%
What we’ve just calculated above is the ‘Gross Yield’ i.e. the rental yield without consideration for running costs and other expenses involved with a rental property. In reality, you’ll have costs to consider so make sure you factor these into your calculations when deciding whether or not a property is a good investment. Here’s what you need to consider:
The premium amount will vary depending on the size of the property, the property type and its location. Typically, however, it’ll probably take up between 2 and 3% of the rent, although this may also be higher if the property is furnished. Landlord Insurance is not the same as regular home insurance, and may not cover you for the unique risks you face as a landlord. As a landlord you may also consider Rent Guarantee.
Replacing Broken Fixtures and Fittings
At the end of each tenancy, it’s likely there will be worn out fixtures and fittings. You’ll also need to factor in the need to re-paint every few years, too.
You’ll also need to factor in maintenance costs. The type, age and condition of the property will all affect the level of maintenance required, so keep this in mind when selecting your property.
If the property is leasehold then you’ll also have to factor in ground rent and service charges.
There’s a good chance that your property won’t always be occupied. Periods without tenants are known as ‘void periods’ as there’s no rent coming in. Factor in this possibility, and even account for as much as a month’s rent just in case. If you buy well and set the rent appropriately, hopefully this won’t be a problem for long.
If you use a letting agent or a managing agent, you’ll have to pay a fee. This could include marketing, advertising, property management, tenant referencing and inventories.
Mortgage or Loan
Of course, the largest sum will probably be your mortgage. Competitive deals are now available, but you’ll need to put up around 10% of the property’s value as a minimum; although even these are rare. Even the deposit amount comes at a direct cost to you, so remember that.
Once you’ve calculated all of the costs associated with running a rental property, deduct them from your rental income. Now when you re-calculate your rental yield sum, use this figure. This is your net yield, or ‘true yield’.
Finally, also remember that some of these can be claimed back against your tax bill, but it’s still wise to take them into account.