Calculating your rental yield is vital to help you understand whether or not a property investment is going to be worthwhile. Using a rent yield calculator can help make sure that the gross rental yield is high enough to cover expenses in managing and maintaining the property as well as giving you a sufficient return on your investment. It can also help you compare the rental yield of different investments, helping you decide which is more suitable for your needs.
Understanding Gross Rental Yield vs. Net Rental Yield
When looking at rental yield, there are 2 kinds to consider: gross rental yield and net rental yield.
- Gross rental yield: this measures the annual rental income as a percentage of the property’s purchase price. It is calculated by dividing the annual rent by the property value and multiplying by 100. This figure doesn’t account for expenses, giving a broad view of potential profitability. Our property yield calculator can help you easily see the gross yield of a property if you input the rent you get for the property
- Net rental yield: this gives a more accurate picture by factoring in costs such as maintenance, insurance, property management fees, and other expenses. It’s calculated by subtracting annual expenses from the annual rent, then dividing by the property value and multiplying by 100
Examples
- Example 1: a 2 bedroom apartment in London costing £500,000 generates an annual rent of £24,000. Gross yield: 4.8%. After accounting for £6,000 in annual expenses (maintenance, management fees), net yield: 3.6%
- Example 2: a 3 bedroom house in Manchester purchased for £300,000 with an annual rent of £18,000. Gross yield: 6%. With £3,000 in expenses, net yield: 5%
What Do You Need to Consider When Calculating Net Rental Yield?
The factors you need to consider to calculate net rental yield are listed below.
Insurance Premiums
You’ll need suitable insurance for your property to make sure that it’s protected in case of incidents. Assuming that you’re going to be taking out a mortgage for the rental property, you will be required to have property insurance. This is a requirement because mortgage lenders will not want the risk of property damage making their investment worthless. You might also want to have landlord insurance or contents insurance if you are letting a furnished property. If you pay your insurance premiums annually, you should divide this between the months in order to work out your monthly cost.
Replacing Broken Fixtures and Fittings
As a landlord, you have a duty to make sure the property is habitable and pleasant for your tenants, which includes keeping fixtures and fittings in good working order. Some expenses won’t arise regularly, so you need to consider the average cost per month. You can do this by getting an estimate of how much it will cost to take care of the property you’re planning to rent annually and dividing the yearly cost into a monthly estimate.
Maintenance
You also should consider maintenance that you’ll need to have carried out on the property. This includes plumbing, painting, and other repairs. Again, you should try to estimate this expense. You can do this by looking at local service providers. It’s generally better to overestimate the cost of maintenance than underestimate it. Otherwise, an unexpectedly large maintenance bill could lower your net rental yield significantly.
Ground Rent
If the property you’re intending to rent out is a leasehold property, you’ll need to pay ground rent. This should also be factored into your rental yield calculations. Most flats, apartments and maisonettes are likely to be leasehold. If the rental is a freehold property, you won’t have to pay ground rent.
Empty Periods
Whatever type of rental property you’re investing in, you should consider the prospect of periods when the property is unoccupied. If you’re letting out a standard buy-to-let, these periods may be quite short, but on occasions the dwelling could be empty for some time. Refurbishment may also be required at certain points, which may mean the property won’t be tenanted for several weeks or even months, and repairs or renovation may be required between tenants. For short-term rentals, you may have more empty periods. For example, with holiday rentals you might find that there are many empty periods during low seasons. This can significantly lower your net yield.
Agent Fees
If you intend to use an agent for any part of the letting process, you’ll also need to consider agent fees. Depending on whether you’re using an agent or a management company, they might have different types of fees that you should include in your calculations.
