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What is a Good Rental Yield? – The Ultimate Guide

 

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What is a Good Rental Yield



What is a Good Rental Yield



What is a Good Rental Yield



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You may be a first-time investor who’s interested in buying an investment property, or an experienced investor looking for their next buy to let purchase. Whatever your experience level, rental yields are the number one thing that all investors need to focus on.

Without knowing what a rental yield is or how to identify a good rental yield, investors will limit their potential returns. If you’re keen to get the most out of your buy to let investment and want to find out more about yield on rental property, this guide is for you. Here, you’ll find answers to questions like ‘what is a good rental yield?’ and learn tips on working out rental yield percentages. We also outline the best UK areas for property yields, and offer tips on maximising rental returns. If this sounds useful to you, keep reading for our detailed guide to buy to let yields.

Understanding Rental Yields

A rental yield is the percentage of return on investment that a property investor receives through rental income. A property rental yield tells you how much money you will make from your investment. That’s why rental yields are used to determine potential buy to let income.

Rental yields can be assured for one year or more depending on the developer. Investors will usually pay a lot of attention to rental yields, and put a lot of time into their search.  Some investors will search for the best rental yields in the world, while others will focus on the UK for a property with the best buy to let yield. Researching areas is key to finding the best yield on property investment.

So why are rental yields considered so important when buying an investment property? The main reason so many people invest in real estate is to enjoy a cash flow of rental returns. Ensuring that you generate a high rental return is crucial if you want to maximise income.

However, while they are important, rental yields aren’t the be-all and end-all of a buy to let investment. The best buy to let investment strategies combine a good rental yield with capital appreciation and tenant demand.

Say, for instance, you buy a property with an average rental yield of 8%. A high average rental yield is great, but imagine that the postcode the property is based in shows no sign of future house price growth. The property itself also struggles to drive demand, leaving you without tenants for long periods. If you don’t investigate levels of demand and potential capital growth, you won’t feel the full benefit of the investment, no matter how high the buy to let yield.

Want to know how to work out yield on rental property? It’s simple. Divide your annual rental income by the purchase price of the property and multiply your result by 100. This property yield formula will leave you with a buy to let rental yield percentage.

If you already own a buy to let property and don’t know your current yield, calculating rental yield may be easier to do. Since you already know how much you generate in rental income, you can use this to calculate an accurate yearly figure.

 

How to Work Out Yield on Rental Property You Don’t Yet Own

If you want to know how to work out yield on a rental property you haven’t yet purchased, there are different things you can do. Many property investment companies advertise either assured or projected rental yields for properties. If buy to let yields are listed as assured, this will normally be for a set number of years. If you’re buying property privately, without the help of an investment company, there are things you can do. Researching average rental yield statistics for the area a property is based in is a good idea. You could also look at current rental prices for similar properties in the area and calculate their rental yield to get an idea of what to expect.

If you’re in the process of buying an investment property, you could also consider creating your own rental yield calculator.  For this, all you would need to do is create an excel spreadsheet using numerical formulas to instantly multiply and divide each figure. By doing this, you can quickly and easily work out rental yields for multiple properties at a time. Alternatively, if you only need to check the yield of one or two select opportunities, you could use an online buy to let yield calculator.

For investors exploring tips on how to become a property developer rather than just a buy to let investor, it’s important to factor some additional costs into your rental yield calculation. The money spent on renovations, for instance, would also be factored into your property price costs.

Gross rental yield is everything before expenses, while net rental yield is the rental yield figure after expenses. Net rental yields are often favoured as they’re more accurate than gross yields. However, gross rental yields are easier for investors to calculate themselves.

Added costs that are factored into a net rental yield include maintenance costs, agent or management fees, mortgage repayments, and taxes like mortgage tax and stamp duty.

When working out net rental yield, you may also need to factor in the possibility of void periods where your property isn’t being occupied. To be on the safe side, account for a month or two of rental loss so that you’re more prepared if you do encounter void periods.

The net rental yield can be difficult to calculate if you don’t already own the property or know the exact costs involved. At RWinvest, we provide details on the net income for each of our investment opportunities. This way, you’re able to find a high yield property more quickly and easily than if you had to manually work out the rental yields yourself.

 

What is a Good Gross Rental Yield?

Since gross rental yields don’t factor additional costs into the property yield formula, rental yields may appear to be higher than they actually are. For this reason, gross rental yields should be a little higher than net yields. This way, the net rental yield you end up with, which is the accurate rental yield percentage, won’t seem low in comparison.

 

What is a Good Net Rental Yield? 

After all additional costs have been accounted for, a good net rental yield should be between 6 to 8%. A rental yield of this figure ensures the investor is still making a significant return on their investment, even after mortgage payments, taxes, and more.

What is a Rental Yield?

A rental yield is the percentage of return on investment that a property investor receives through rental income. A property rental yield tells you how much money you will make from your investment. That’s why rental yields are used to determine potential buy to let income.

Rental yields can be assured for one year or more depending on the developer. Investors will usually pay a lot of attention to rental yields, and put a lot of time into their search.  Some investors will search for the best rental yields in the world, while others will focus on the UK for a property with the best buy to let yield. Researching areas is key to finding the best yield on property investment.

Why are Rental Yields Important?

So why are rental yields considered so important when buying an investment property? The main reason so many people invest in real estate is to enjoy a cash flow of rental returns. Ensuring that you generate a high rental return is crucial if you want to maximise income.

However, while they are important, rental yields aren’t the be-all and end-all of a buy to let investment. The best buy to let investment strategies combine a good rental yield with capital appreciation and tenant demand.

Say, for instance, you buy a property with an average rental yield of 8%. A high average rental yield is great, but imagine that the postcode the property is based in shows no sign of future house price growth. The property itself also struggles to drive demand, leaving you without tenants for long periods. If you don’t investigate levels of demand and potential capital growth, you won’t feel the full benefit of the investment, no matter how high the buy to let yield.

How to Calculate Yield: How do you Calculate Yield on Rental Property?

Want to know how to work out yield on rental property? It’s simple. Divide your annual rental income by the purchase price of the property and multiply your result by 100. This property yield formula will leave you with a buy to let rental yield percentage.

If you already own a buy to let property and don’t know your current yield, calculating rental yield may be easier to do. Since you already know how much you generate in rental income, you can use this to calculate an accurate yearly figure.

 

How to Work Out Yield on Rental Property You Don’t Yet Own

If you want to know how to work out yield on a rental property you haven’t yet purchased, there are different things you can do. Many property investment companies advertise either assured or projected rental yields for properties. If buy to let yields are listed as assured, this will normally be for a set number of years. If you’re buying property privately, without the help of an investment company, there are things you can do. Researching average rental yield statistics for the area a property is based in is a good idea. You could also look at current rental prices for similar properties in the area and calculate their rental yield to get an idea of what to expect.

If you’re in the process of buying an investment property, you could also consider creating your own rental yield calculator.  For this, all you would need to do is create an excel spreadsheet using numerical formulas to instantly multiply and divide each figure. By doing this, you can quickly and easily work out rental yields for multiple properties at a time. Alternatively, if you only need to check the yield of one or two select opportunities, you could use an online buy to let yield calculator.

For investors exploring tips on how to become a property developer rather than just a buy to let investor, it’s important to factor some additional costs into your rental yield calculation. The money spent on renovations, for instance, would also be factored into your property price costs.

What's the Difference Between Gross Rental Yield and Net Rental Yield?

Gross rental yield is everything before expenses, while net rental yield is the rental yield figure after expenses. Net rental yields are often favoured as they’re more accurate than gross yields. However, gross rental yields are easier for investors to calculate themselves.

Added costs that are factored into a net rental yield include maintenance costs, agent or management fees, mortgage repayments, and taxes like mortgage tax and stamp duty.

When working out net rental yield, you may also need to factor in the possibility of void periods where your property isn’t being occupied. To be on the safe side, account for a month or two of rental loss so that you’re more prepared if you do encounter void periods.

The net rental yield can be difficult to calculate if you don’t already own the property or know the exact costs involved. At RWinvest, we provide details on the net income for each of our investment opportunities. This way, you’re able to find a high yield property more quickly and easily than if you had to manually work out the rental yields yourself.

 

What is a Good Gross Rental Yield?

Since gross rental yields don’t factor additional costs into the property yield formula, rental yields may appear to be higher than they actually are. For this reason, gross rental yields should be a little higher than net yields. This way, the net rental yield you end up with, which is the accurate rental yield percentage, won’t seem low in comparison.

 

What is a Good Net Rental Yield? 

After all additional costs have been accounted for, a good net rental yield should be between 6 to 8%. A rental yield of this figure ensures the investor is still making a significant return on their investment, even after mortgage payments, taxes, and more.

What is a Rental Yield?



What Is a Good Yield?



How to Calculate a Rental Yield



Identifying Good Rental Yields

What is a Good Yield on a Rental Property?

Anything above 5 or 6% is generally considered a good rental yield for an investment. In cities like Liverpool, however, it’s common for properties to generate yields as high 7 or 8%.

What’s classed as a good rental yield also differs between residential and student investments. So what is a good rental yield for student vs residential property? A minimum of 6% indicates a smart investment for residential property. For student accommodation, however, a rental return of up to 8% is a lot more common.

But why does student property generate good rental yield averages? Student tenants tend to reside within the same accommodation for at least one academic year, giving investors a secure period in which returns are assured and void periods dodged. Student properties also tend to come with a cheaper market price, especially since a lot of the properties are studio apartments. Paired with high monthly rent, investors can end up with a strong yield on rental property investments.

Residential property yields are also capable of reaching some very high figures. Our Parliament Square residential development, for instance, offers net rental yields of 7%.  However, since residential properties tend to come with higher property prices than student property, achieving stong yields can sometimes be more difficult.

Which UK Areas have the Best Rental Yields?

Now that you understand what rental yields are, how to work out rental yield, and the difference between net and gross rental yield, it’s time to look at rental yields by city in the UK. When you explore buy to let yields by postcode, you’ll find that certain UK areas can differ quite dramatically in their average property yields. So where can you find the best rental yields?

In the UK, cities up North currently boast some of the best buy to let yields while the South offers disappointing rental returns in comparison. Based on Zoopla data, the average rental yield London offers is just 3.64%. This low figure is down to the excessive costs of properties in the area paired with dwindling rental price growth. A typical rental yield for a residential apartment in South Kensington’s SW7 postcode will bring in a rental yield of 4.61%. In comparison, this rental yield is more than half of the 10% average rental yield in Liverpool’s L1 postcode. The best rental yields in London can be found in the E12 postcode with 6.04% yields on average.

For those who want to secure the best rental yields possible for their investment, it’s important to learn more about good rental yield areas. Let’s take a look at some of the top choices for the best place to invest in property in the UK for those who want to find the best rental yields available.

Liverpool Rental Yields 

Located in the north-west, Liverpool is one of the UK’s top buy to let cities and boasts some of the best rental yields in the country. Not only does Liverpool have a high rate of property growth, but the city is also home to the UK’s top rental yield postcode for 2020. In L1, a Liverpool city centre postcode, rental yields reach 10%  which resulted in the top position within Totally Money’s buy to let guide.

Average rental yields in Liverpool stand at around 5.48% on average based on recent Zoopla data. Some of the best rental yields by postcode in Liverpool are all based in the city centre. This includes L1 with 10% yields, L6 with potential yields of 8.1%, and L2 which generates yields of 7.56%. Average rental yields in this city even outrank many countries with the best rental yields in the world for 2018. For example, Germany offers an average rental yield of just 3.99%.

Why Does Liverpool Have Some of the Best Rental Yields in the UK?

Liverpool boasts some of the best buy to let yields due to its popularity with renters. Since many of the most highly ranking postcodes are located in Liverpool’s city centre, it’s clear that the city’s high population of young professionals and students is helping to grow the average property yield significantly.

According to Go Compare, Liverpool has average rental price growth of 2.65%. The current average monthly rental cost in Liverpool is £898 according to Zoopla. Liverpool property prices are famously low compared to most other parts of the UK, with a current average value of £186,967 and some properties, such as our student property, the Bridewell, being priced from just £74,995 with 8% net rental yields.

As previously mentioned, student properties tend to generate some of the highest rental yield rates. Boasting a student population of over 70,000 and housing some of the UK’s top institutions such as the University of Liverpool and Liverpool John Moores University, Liverpool is filled with students seeking quality rental accommodation. Many of these students are from overseas countries, and might be willing to splash out on more high-end accommodation. Luxury student accommodation has become more popular over recent years and consists of apartments with modern designs, state of the art fixtures and fittings, and attractive amenities like onsite gyms, 24-hour security, and super-fast WiFi. Those who purchase a luxury and more high-end property in Liverpool could benefit from an attractive buy to let yield.

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Manchester Rental Yields 

Another of the North’s key cities, Manchester is considered an ideal investment area when comparing rental yields by city. So what is a good rental yield in Manchester? Average rental yields in Manchester are just under those in Liverpool at 5.16% based on Zoopla data. Pair these fantastic rental yields with an expected 22.8% property price growth by 2022, and it’s clear that Manchester is a win-win location for both rental returns and capital growth.

 

Why is Manchester one of the Best Cities for High Yield Property Investments?

Like Liverpool, Manchester has demand and affordability on its side when it comes to buy to let. Property prices in Manchester average around £240,919 based on current Zoopla property value statistics, with a huge 5.76% average rental price increase. With a famous business scene and a student population of over 90,000, the number of young professionals and students looking for rental accommodation in the city is high, which has allowed rental values to rise.

The average rent in Manchester, according to Zoopla, is £1,059 per calendar month. Rental costs can vary depending on the area, and spots like Manchester city centre and Salford tend to be more expensive to live in. The average monthly cost for a one bed flat in Manchester city centre is £874, while the Salford average for a one bed flat is a little lower at £782. Both these areas are massively popular with young professionals due to the high number of businesses in the area. Salford, in particular, is home to MediaCityUK – a huge regeneration project which houses multiple big business names such as BBC and Kelloggs. Tenants working in the area drive demand for accommodation which is close to their workplace, local amenities, and transport links. Our new Merchant’s Wharf property, based in between Manchester city centre and Salford Quays, ticks these boxes and offers up to 6.5% projected rental yields.

Another postcode in Manchester with the best buy to let returns is the M14 postcode – a popular student hotspot. Home to the University of Manchester’s Fallowfield campus, this area attracts a lot of the city’s students. Investing in an area like this is a solid option as you’re guaranteed fewer potential void periods, allowing for consistent rental returns.

Using Buy to Let Yields to Your Advantage

How Can I Maximise Rental Yield on a Property?

To maximise your properties rental yield, you need to increase monthly rental costs. But how do you do this? Here are four simple tips on how to maximise rental yield in your buy to let property.

 

1. Raise Monthly Rent Costs With a Rental Valuation

To maximise your properties rental yield, the obvious step to take would be increasing the monthly rental costs before you find your next tenant. Hire a surveyor to do a rent review, where they’ll assess the current rental market and work out the current value of the property. You could find that in line with market growth, your rental property is worth more than you think.

 

2. Update the Property to Add Market Value

If you’re not generating a high enough property yield, it could be that your rental property is in need of an update. Have a look at the current rental price of properties in the area, and pay attention to any features that they might have which your property doesn’t. Properties with modern kitchens and bathrooms, up to date decor, and some kind of outdoor space like a garden, yard, or balcony all tend to have higher rental value.

 

3. Offer Competitive Qualities

There are certain things you could offer tenants that may make your property more appealing. One example could be to include stylish furniture for tenants to use, along with state of the art white goods and fixtures. Another idea could be to make your property pet-friendly. Small things like this can go a long way in boosting the rental value of the property.

 

4. Look for the Best Units

If you haven’t bought an investment property yet, or you’re looking for a new investment to add to your property portfolio, keep quality in mind when searching for your next purchase. With off-plan developments, you will often be able to cherry-pick the best units. Apartments with balconies, spacious layouts, and modern designs tend to make a good investment as they generate the best rental yields. Focusing on property developments with luxury facilities such as an onsite gym or communal garden is another great tip. Properties with facilities like these are naturally higher in rent. They’re also hugely in demand right now, with more tenants seeking qualities like gardens in their rental property due to Covid-19 and the rise of working from home.

 

 

Using Rental Yields in Your Investment Strategies

So we’ve covered all the most important elements of rental yields, and hopefully, you’re feeling ready to take on your first or next buy to let investment and attract the best rental yields in the process. One final thing you need to think about is how you’re going to utilise rental yields in your property investment strategy.

When creating your investment strategy, you first need to understand your goals. Do you want to focus solely on rental returns, or are you more interested in capital gain? Or, are you keen to include both these goals in your strategy?

We already touched on the importance of focusing not just on rental yields but factoring in house price growth too. This way, you don’t limit your chances of making two types of return on your investment as yield and growth go hand in hand. This is something that you don’t get with the stock market, as investing in stocks only allows for one type of return. That’s why, when choosing between a pension or property investment, many people view property as a more lucrative option.

You should definitely take advantage of the potential for multiple returns that comes from real estate investing. Look at the statistics on house price growth in the city your investment is based in, along with any regeneration as this can boost growth massively. You also need to pay attention to demand in the area, as without this, your rental returns will be inconsistent. Increasing rental costs are usually a good indication of high levels of demand, so try and seek these out whenever you find an opportunity you’re interested in.

If you’ve found an investment property with a promising rental income, strong capital growth, and in an area with a thriving property market, you’re on the right track towards a lucrative and rewarding buy to let venture!

Best Areas for Rental Yields in the UK

Best Areas for Rental Yields



Best Areas for Rental Yields



Best Areas for Rental Yields



Your Rental Yield Checklist

To summarise, here’s a quick and helpful checklist outlining everything you need to consider regarding rental yields during your investment journey.

 

Know Your Stuff

What is a rental yield? And what is a good yield on rental property? Make sure you’re clued up on all things rental yields, and understand both what a rental yield is and how to identify a good yield.

Recap: What is a Rental Yield?

Rental yields are figures that reveal the percentage of rental return you will receive on your investment.

Recap: What is a Good Rental Yield?

A good rental yield is typically anything above 5 or 6 per cent, but you should aim as high as possible for the most attractive returns. Higher yields can be found in top buy to let cities like Liverpool where they reach up to 8 per cent or over.

 

Identify the Areas with the Best Rental Yields

Rental yields are largely dependent on location. If you want to invest in rental properties, you need to research and identify the high rental yield areas in order to find the best opportunities.

Recap: Which Areas Offer the Best Rental Yields?

Liverpool and Manchester are some of the best locations when comparing rental yields by city, but make sure you dig a little deeper and assess the average rental yields in each postcode to find your ideal investment.

 

Consider Capital Growth in the Area

Don’t just focus all of your attention on rental yields. To improve your investing efforts, you need to pay attention to capital growth in the area as this indicates whether or not your property is likely to appreciate in value by the time you come to sell. If the property you’re interested in has amazing rental yields but average growth rates, decide which quality is more important to you. If you’re not willing to settle for one without the other, keep looking!

Tip: How do I Find Capital Growth Rates?

Information on past and future capital growth predictions can be found using past house price data or by checking growth predictions from property experts like Savills. Read our guide to the best place to invest in property for up to date UK capital growth statistics.

 

Find a Suitable Investment Property

Once you’ve chosen a location, it’s time to seek out the perfect investment property for you. Student and residential properties are the two main buy to let options, with student accommodation often offering higher yields due to the low costs and high rental value. Assess which opportunity you think will offer you attractive and consistent rental returns for many years to come.

Tip: How do I Find Out About the Best Investments?

Sign up to the RWinvest email list at the bottom of this page to receive information on the latest investment opportunities, with fantastic offers becoming available on a regular basis.

 

Work out Yield With a Property Yield Formula or a Buy to Let Return Calculator

Now that you’ve found a possible investment property, you need to work out your potential rental yield.

Recap: How to Work out Rental Yields

Yearly rental income divided by property price multiplied by 100 = rental yield.

When you need to work out rental yield, a calculator can help, or you could create your own property yield formula. Research the rental value of the property or those in the area, take the listed property price, and consider any added annual costs. You can then input these into a net rental yield calculator to get a better idea of your potential rental yield.

 

Look at Levels of Demand

Pay close attention to levels of demand in both the area of the investment and for the property type itself.

Recap: How to Research Rental Demand

A good way to research rental demand trends is to look at existing listings on property sites. If there are certain properties that have been listed for a long time, this could indicate a lull in demand for either the property or the location it’s based in. Any rising rental costs may also mean that there’s a lot of demand in the area as people are prepared to pay more money to live there.

Put These Tips and Advice Into Action

We hope you’ve enjoyed these property investment tips and found them useful. Now that you know more about rental yields and the part they play in buy to let, why not take your next step and find your ideal investment? We can offer expert advice for landlords to-be, and love to help people begin their rental property investing journey.

Contact us today, and we’ll help you find the perfect opportunities for you. For more information on all things property investment, stay up to date with our investor guide content where you can find tips and information on things like property prices after Brexit, along with our RWinvest property podcast series.

 

The data we used

The information used in our ‘what is a good rental yield?’ guide was taken from a range of sources. For average rental yields in Liverpool, Manchester and London, we used house price and rental vale data from Zoopla, and the buy to let yield map from Totally Money. The average property value in Liverpool and Manchester was found on Zoopla, along with information on the average current price for rental costs.

The information on this page was last updated in October 2020. Please keep in mind that statistics and data may have changed depending on the date you read this content.

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