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Is My Rental Property a Good Investment?

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    How to Maximise Returns on Your Rental Property Investment

    One of the most crucial parts of property investment is making sure your investment is lucrative enough to generate a solid return on investment. But how do you identify a good opportunity from a bad one?

    If you’re asking ‘how do I know if a rental property is a good investment?’, you can find out in this easy-to-follow blog post. 

    Here, you will learn about five factors that make a profitable residential rental property. 

    Other topics we will discuss include: 

    • What is a good rate of return on rental property? 
    • How to determine a good rental property? 
    • Is rental property really a good investment? 
    • What makes rental property a good investment? 

    Keep reading to learn more… 

    house model on piles of coin

    Is Rental Property Really a Good Investment in 2021?

    Currently in the UK, the real estate market is thriving. With house prices growing at the fastest rate since 2004, and average rental income now at an all-time high of £1,061 PCM, there’s never been a better time to invest. 

    But not all investments are made equal, with property needing to meet certain criteria to generate high returns. 

    To help you understand what makes a rental property a good investment and help you answer the question “Is my rental property a good investment” here are five factors you should consider when looking to buy real estate.

    Manchester aerial view

    1. Choose a City With Strong Rental Demand

    The first step in how to determine a good rental property is deciding on its location. 

    Location is vital to the success of a property investment as it will impact average rental income, capital gains potential, and most importantly, tenant demand. 

    You’ll want to invest in a city that offers a young population with affordable property, with good universities and job opportunities to give you plenty of options for your investment property.  

    Likely the best places to invest in UK property in 2021 that generate high rental income and strong capital gains potential are:  

    You can learn more about property investment in these cities by clicking the links. 

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    Georgian-Quarter-Liverpool

    2. Pick a Neighbourhood and Target the Right Tenant

    Now that you’ve decided on your city, it’s time to narrow down your search for what neighbourhood you want to invest in. 

    Research here is vital as you will need to learn more about the top postcodes in the city by working out their investment potential and rental income. You can do so by checking out our property guides listed in our first tip. 

    You should focus on average rental income to see your return potential, as well as the area’s affordability, population, amenities, schools, and crime rates.  

    By picking your neighbourhood, it will greatly impact what type of tenant you target and the type of investment property you choose. 

    If you choose a city centre, which is recommended, you will likely be able to target both young professionals and student tenants, meaning you can buy normal residential property or student accommodation. 

    For our money, the best property type to choose for beginner investors is city centre off-plan apartments as they are more affordable and prove incredibly popular amongst young professional tenants.

      buy-to-let-red-house

      3. Focus on Rental Yield/ Cap Rate

      Perhaps the best way of answering “is my rental property a good investment” is by working out the rental yield. 

      rental yield is a percentage figure that shows how much return on your investment you will earn through rent every year. 

      Not only does a rental yield show your rental income, but more importantly, it shows just how good of a return on investment you’ll be getting from rental income. 

      You can calculate rental yield by dividing the yearly rental income/ annual rental income by the initial investment purchase price and multiplying by 100 to work out the gross rental yield (returns without expenses). 

      Example: 

      Property Purchase Price: £100,000 

      Monthly Rental Income: £1000  

      Calculation: ((£1000 x12)/£100,000) x100 = 12% gross rental yield 

      To work out the NET rental yield, which is a more accurate figure, you’ll need to know your monthly expenses – something that will be difficult if you don’t already own the property. 

      Types of expenses that can impact landlord profits are: 

      • Property taxes and a large tax bill like stamp duty or income tax 
      • Running costs or maintenance costs on rental properties 
      • Mortgage interest/mortgage payments (you can learn more in our buy to let mortgage interest guide) 
      • Property management company expenses for managing investment properties 

      So, what is a good rate of return on rental property and real estate? Generally, a good rental yield is 5% or above. It’s common to find buy to let properties in places like Liverpool that offer 8% NET rental yields.  

      By targeting buy to let properties with high rental yields, you can set yourself up for massive investment success.  

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        4. Think About Capital Growth

        Depending on your goals, you may see property investing as a perfect gateway to early retirement.  

        If this is what you have in mind, a fantastic way for buy to let investors to buy rental properties is by focusing on capital appreciation. 

        Capital appreciation, otherwise known as capital growth or capital gains, is the change in a property’s value over time. By targeting properties with high growth potential, you can net yourself a significant profit later down the line. 

        But how do you target capital appreciation? Well, the best way is to focus on cities with high growth potential and affordable residential buy to let property. 

        For example, the average Manchester buy to let property has increased in value by 315% since 2001 – the highest capital growth rate out of every major UK city.  

        You’ll set yourself up for even bigger capital growth potential by investing in more affordable off-plan homes. 

        Take City Point, for instance, a fantastic Liverpool student buy to let property offered by RWinvest that increased in value by over 16.67% in just nine months! 

        By buying off-plan investment opportunities in cities like Liverpool, you can set yourself up for significant success later down the line. 

        Foreign Investment in the UK 2023/24

        Based overseas? This is the perfect guide for property investors looking to buy property in the UK.

        Download Guide

        Off-Plan vs Completed Property

        The ultimate guide to help you choose whether to invest in off plan or completed property in 2024.

        Download Guide
        LIVERPOOL, UNITED KINGDOM - Apr 03, 2019: A beautiful view of the modern regeneration of Princes Dock in Liverpool, UK

        5. Consider Regeneration/ Future Development

        If you’re wondering, “is my rental property a good investment?” it’s a good idea to target locations with high urban regeneration potential. 

        Regeneration is vital to the success of a neighbourhood and can include improvements to transport links, green spaces, employment opportunities, and local amenities, making an area a much better place to live. 

        Cities like Manchester and Liverpool are fantastic examples of this, with huge regeneration since the 1980s transforming both areas into economic powerhouses with thriving buy to let property markets. 

        In areas with high regeneration, you’re likely to see increasing rent levels and capital appreciation, setting yourself up for huge success. 

        You can check out if an area is set for regeneration by reading the city council’s regeneration master plan, such as Regenerating Liverpool. 

        Alternatively, you can read our ultimate guide to urban regeneration where we break down the major upcoming regeneration projects in the UK’s top investment locations. 

        A key with house key chain on a door

        How to Determine a Good Rental Property?

        Now that we’ve looked at five ways you can work out what makes a rental property a good investment, it’s time to summarise five ways to determine a good rental property. 

        This includes: 

        1. Your investment property is in a top investment city with strong rental demand. 
        2. Your property is in a city centre location and targets young professionals or students. 
        3. The property generates NET rental yields of 5% or higher. This will mean high yearly rental income, low house prices, or lower monthly expenses like mortgage interest payments. 
        4. Your property is affordable to buy and is in a high-growth potential area like Manchester or Liverpool. 
        5. When investing in rental property, your property is found in an area with ongoing regeneration projects.

        By matching these criteria, you will know if a rental real estate is a good investment. 

        Foreign Investment in the UK 2023/24

        Based overseas? This is the perfect guide for property investors looking to buy property in the UK.

        Download Guide

        Off-Plan vs Completed Property

        The ultimate guide to help you choose whether to invest in off plan or completed property in 2024.

        Download Guide

        Choose an Investment Property With RWinvest Today

        Are you wondering how to invest in property as a beginner, and ready to invest in the best real estate the UK property market has to offer? Then choose RWinvest today.

        We are an award-winning property investment company with over 17 years of experience in residential and student property.

        Named the North West’s Best Property Business in 2020, we have helped over 75,000 investors make the investment of their dreams.

        Our buy to let properties start from just £74,950 and offer huge 8% NET rental returns.

        Click the link below and have a quick chat online with one of our property consultants who can help find a property that meets your investment goals today.

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        Author

        Reece Pape

        Reece Pape is a property writer at RWinvest. Reece is passionate about keeping property investors updated on must-have information and housing market news, utilising the latest property market statistics and data.

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