How Much Profit Should You Make From a Rental Property?

Profit from a rental property is calculated in different ways depending on the type of income you want to use.

Rental yields are how we calculate the profit investors make from rental income. This is represented by a percentage value that represents a year-on-year return from the cost of your initial investment.

This is calculated using the annual rental income of your buy-to-let property, which is divided by the cost of the property itself and then multiplied by 100 to give you a percentage value.

For example, a 5% rental yield would mean you will make 5% of your investment back each year, so after 20 years you would have made your initial investment back solely through rental income.

There are two kinds of rental yields which you can find. Gross rental yields only take into account the rental income and cost of the property, whereas NET rental yields will also use the operating expenses of the property if these are known. This could include bills, insurance, repairs or services such as management fees charged by property management companies.

NET yields are more accurate, which means they are often preferred by investors as they provide a clearer picture of the kind of returns you can expect from a rental property as they take into account the net operating income you need to spend each month.

To calculate the profit you make from capital appreciation, simply get a valuation of your rental property and subtract the purchase price of your property. You can use this figure to work out a percentage profit, or simply use the cash to indicate how much profit you will make.

For example, if you bought a rental property for £200,000 and get a valuation of it which comes to £250,000, you would make a profit of £50,000 or 25% of your initial investment.

For an overall cash-on-cash return to work out a net profit, you will want to look at the income you make from rental income over time as well as the estimated potential profit you will make from capital appreciation.

You can do this if you have access to the expected rental yield for your property, using this to calculate how much of a percentage return you will make on your initial investment.

To try and predict capital appreciation, check predictions by sites such as Savills or JLL. These property experts publish five-year forecasts that give investors a good idea of how house prices will rise or fall in the future, based on market trends.

For example, if you buy a rental property in Liverpool with a projected 5% rental yield for £200,000, you can look at the residential property market forecast from Savills to see how house prices in the North-West will grow. The current prediction for 2027 is that prices will grow by 11.7% in the North-West, giving you an estimate for capital appreciation.

Putting this information together, you can determine that over five years, you can anticipate around a 37% profit on your investment if you chose to sell your property after five years, combining the rental yield for five years worth of rental income with the projected growth of house prices in the area.

How much profit you should make from a rental property will depend on where you choose to invest, as well as what you invest in.

Generally speaking, the average profit on a rental property will differ depending on where the property is located. Given that every city in the UK has variations in property prices as well as rents, the average profit on a rental property will differ.

On a national average, a rental yield of around 4-5% is considered the average profit on a rental property from rental income, as this will give you a solid return on investment.

Some cities with higher property prices, such as London, have lower average rental yields due to the higher price of housing.

The opposite is also true, with cities like Liverpool having higher average rental yields based on the fact that property is far more affordable here than the national average. This is one of the reasons why Liverpool is often considered the best place to invest in property in the UK.

In general, it is best to try and find above-average rental yields to ensure you are making a strong return on your investment. A yield of 6-7% will bring you higher rental profits on your rental property, and is, therefore, something you should try to seek out.

For capital appreciation, you should expect the average profit on a rental property to be in line with forecasts for the area you are investing in.

You can also look at the House Price Index from the Land Registry and Zoopla to see how prices are currently growing, as this will give you a good indicator of if your property is rising in value in line with the area around you.

That means if your property has not risen in value in line with projections of market value, you may need to look at reasons why this could be the case.

Given that rental income will form the backbone of your profits until you decide to sell, deciding how much rent you want to charge is a very important decision for investors.

While it can be tempting to charge as much rent as possible to achieve a high rental yield, you have to follow rental market trends to avoid pricing people out of your property.

Try looking on property portals such as Rightmove and Zoopla to see what rental properties close to where your property is located are charging. Be sure to compare properties similar to yours, in terms of size, location and condition.

This will give you a rough estimate of how much you can realistically charge.

Remember – although high rental yields are ideal for ensuring you get strong profits, it may not always be possible.

For example, finding a high rental yield in London would be difficult as property prices in the capital are so high, and so charging enough rent to create a high yield would price most potential tenants out of renting your property.