Understanding property rental yields

Posted by Mark Lloyd, Property Mastery Academy on 27 January 2020 | Comments

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Property rental yield is a way of calculating the return you’re making on a rental property investment.

Yields can vary dramatically because so many factors such as regional variation, property prices and capital growth come into play.

commercial property yields

How to calculate gross property rental yield

Gross property rental yield is calculated by dividing a year's rent by the purchase price of the property and multiplying by 100.

If you purchase a £400,000 property and take £1,500 a month in rent, your annual rental income is £18,000, and the gross rental yield is 18,000 divided by 400,000 x 100, which equates to 4.5%.

Gross rental yield doesn’t take into account other cost factors such as mortgage payments, buildings insurance or maintenance of the property.

How to calculate net property rental yield

Net property rental yield is worked out by first deducting the costs associated with the property from your annual rental income.

Then there are two options you can use to calculate the net yield. You can either work out the yield by dividing your net income with the property’s value. Or you can use the initial capital outlay on the property, which is the full amount less what you’ve borrowed via a mortgage. Obviously, the rental yield percentage is going to come out higher using this last option.

Calculating net rental yield rather than gross gives you a much clearer picture of your income versus expenditure on the property.

How to maximise property rental yield

According to Property Investments UK, a rental yield of 7% would be considered good.

But fluctuations on this are common due to changes in mortgage interest rates, taxes, plus tax relief available, and variations in property prices.

There are many ways you can increase your rental yield. The most straightforward method is to increase the rent on the property. However, this is only viable if you’re currently charging less than the going market rate for your type of property in that area.

There are other ways to potentially maximise your rental yield by making the most of any tax relief. You may be able to offset certain costs from your income such as buildings and contents insurance, council tax, any utility bills you pay on behalf of your tenant, and necessary maintenance.

However, from April 2020, you won’t be able to deduct mortgage interest from your rental income when calculating your tax if the property is purchased in a personal name. From this date, all your rental income is taxed, but you qualify for a 20% tax credit on your mortgage interest.

A good way to increase rental yield is to upgrade your property. You can charge more rent if you have features that are in demand by tenants, including high spec kitchens and bathrooms. Read our recent post on What Renters Look For - 6 Most Wanted Property Features.

Surprisingly, one simple way to make your property more popular is to allow pets. We’re a nation of animal lovers, and there are millions of pet owners in the UK. Some landlords don’t allow pets but, if you advertise your property as pet-friendly, you may find tenants willing to pay that bit extra.

Would you like to learn more about property investment?

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