A landlord’s guide to rental yield

Rental yield is the financial return a landlord is likely to achieve on a property. Put simply, it’s the difference between the money you put into a property and the money you earn from renting it.

Rental yield is one of the most important metrics for landlords. Not only does it help you figure out whether your property is a worthwhile investment, rental yield can also be a deciding factor when getting approved for a buy-to-let mortgage.

Gross vs net rental yield

Rental yield can be a gross or net figure, depending on whether the landlord’s expenses and running costs are taken into account. Both gross and net yields are expressed as percentages.

What is gross rental yield?

Gross rental yield doesn’t factor in expenses. Instead, it compares the price of the property with the income generated through rent. It’s normally used when the landlord doesn’t know their specific costs.

You can use gross rental yield to get a quick snapshot of your potential financial return, and it can be particularly helpful when comparing prospective properties. It’s also often used by mortgage lenders when considering whether someone can afford a buy-to-let mortgage.

The downside of gross rental yield? It’s not that comprehensive. Owning a property comes with many costs and fees, and gross yield doesn’t help you understand how these will affect your return on investment.

What is net rental yield?

Net rental yield considers the price of the property, income generated through rent and the costs that come with owning a property. These costs include landlord insurance, interest rates, letting agency fees and ground rent.

Because it takes expenses into account, net rental yield gives a more accurate understanding of your financial return on a buy-to-let property.

How to calculate gross rental yield

You can calculate gross rental yield in three steps:

1. Get your annual rental income by multiplying the monthly rent by 12, or the weekly rent by 52.
2. Divide your annual rental income by the price of the property.
3. Multiply this figure by 100. The answer you get will be your gross rental yield percentage.

For example, a landlord purchases a property for £200,000. They charge £1,000 a month in rent, so have an annual rental income of £12,000. They divide 12,000 by 200,000, getting 0.06. They then multiply this by 100, getting 6. Their gross rental yield is 6%.

How to calculate net rental yield

To calculate net rental yield:

1. Calculate your annual rental income.
2. Subtract your annual costs.
3. Divide this figure by the price of the property.
4. Multiply this figure by 100.The answer you get will be your net rental yield percentage.

Using the same example, a landlord purchases a property for £200,000 and has an annual rental income of £12,000. Their costs come to £2,000 a year, giving a net annual income of £10,000. They divide 10,000 by 200,000, getting 0.05. They multiply this by 100, getting 5. Their net rental yield is 5%.

Average rental yield in the UK

According to research by SevenCapital, the average rental yield is 3.63%. But this varies from region to region:

Regional differences come down to factors such as demand, competition and prices in different parts of the country. For example, because properties in London generally come with higher purchase prices, shorter tenancies and higher upkeep costs, rental yield is lower than the rest of the UK.

What is a good rental yield?

Gross rental yields between 5 and 6% are generally considered ‘good’, while anything above 7% are seen as ‘very good’.

But there are many factors to think about when defining a ‘good’ rental yield, including the location and the type of property. For example, because London has a lower average rental yield, a ‘good’ rental yield in the capital is often considered to be between 4 and 6%.

How to improve your rental yield

Rental yield is influenced by a number of external factors, including the property market and interest rates. But there are still a few things you can do to boost your return on investment.

Adjust the rent

If you’ve set the rent below the market rate, you could be losing out on potential rental income. There are many things to consider before increasing rent, such as contract limitations and the condition of the property, but upping the price could boost your rental yield.

On the other hand, setting the rent too high can make it difficult to find tenants. Lowering the rent to a more competitive rate could stop the property sitting empty between tenancies, therefore increasing your annual rental income.

Aim for long-term lets

When tenants move out, you’ll have costs associated with inspecting your property, completing inventory and end-of-tenancy cleaning. And before new tenants move in, you’re likely to need to pay for advertising, referencing and processing contracts.

Longer-term lets can reduce the turnover of tenants, in turn reducing these costs that cut into your rental yield.

Evaluate your providers

Sticking with your current providers might save time and admin, but isn’t always the cheapest option. You could get better deals if you look into remortgaging, finding another referencing service or switching your landlord insurance.

Become more hands-on

You could also reduce or eliminate costs by doing things yourself rather than paying a third party to do them for you. For example, you could work on your maintenance skills to save costs, or you could arrange viewings directly with prospective tenants rather than going through a letting agency.

Although this could go a long way towards maximising your rental yield, becoming more hands-on isn’t for everyone and might not be possible if you have a lot of other commitments or a particularly large property portfolio.

Can you guarantee your rental yield?

Given how much costs fluctuate, you can't guarantee your net rental yield, but you can take steps to reduce costs and protect your rental income. The two main ways to protect your rental income are:

1) Guaranteed rent schemes (also know as rent-to-rent) involve you entering into a contract with a letting agency and renting your property to them for a pre-determined period of time. They'll usually pay you slightly below the market rate in return for guaranteeing your rental income, regardless of whether there's a tenant in situ.

2) Rent guarantee insurance is an insurance product designed for residential landlords. It can pay out rental income lost by a tenant defaulting on their rent. With Superscript's rent guarantee insurance, you also get cover for legal expenses related to repossessing your property, undergoing a tax audit or being involved in a contract dispute.

You may also be interested in:

• Deposit protection schemes – a guide for landlords
• Do I need landlord insurance if I have home insurance?
• A guide to finding the right tenant for your property