What Is A Good Rental Yield, and Why Are Rental Yields Important?

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.

Rental yields represent this cash flow of rental property in a simple-to-understand way; the higher the percentage, the better the investment’s income potential.

While it doesn’t mean you will get higher rent, it does show the return on your investment, which is essential to any investment class.

No one wants to lose money on an investment. This is why you should be aiming for properties that are more affordable with higher rental costs to ensure the best rental yields.

Property is a long-term strategy, and with high rental yields, it shows an asset class has long-term sustainability without the investor having to worry about damaging their income with running costs.

However, while they are important, rental yields aren’t the be-all and end-all of buy-to-let investment.

The best buy-to-let investment strategies combine a good rental yield with house price growth potential 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 is.

This is something we will address in a later section, but for now, the bottom line is rental yield is essential to consider for a successful property investment.

When comparing property rental yields, all yields aren’t made equal.

Due to the different price points seen between student vs residential properties, the definition of what makes a good rental yield will change between the pair.

A high yield doesn’t always mean student property is superior to residential, as residential will offer far higher house price growth rates for the future.

If you want to learn more about property investment strategies and understand the pros and cons of residential, student and other types of property, be sure to check out our guide.

In the meantime, let’s take a look at what makes a good rental yield for student and residential properties.

A minimum of 5% indicates a smart investment for residential property. For student accommodation, however, a rental return of up to 7% is a lot more common.

But why does student property generate such 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 are dodged.

Student properties also 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.

However, since residential properties tend to come with higher property prices than student property, achieving strong yields can sometimes be more difficult and investors should do their research to ensure they’re securing an investment with the highest yields possible.

So if you want to know what is a good rental yield for student properties, aim for above 6%. Whereas, if you are wondering what is a good rental yield for residential property, expect slightly lower returns.

So, what happens if you don’t know the property’s rental income to calculate a rental yield? Well, there are a few things you can do.

Firstly, you may not have to calculate rental yields if you use the services of a property investment company.

When buying through a company like this, many property investment companies advertise either assured or projected rental yields for properties.

This means you will already know what rental yields to expect when entering an investment. 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.

To do this, you can check local rent statistics on property portals like Zoopla or Rightmove.

Here, you can type in your target postcode and see the latest property prices and rental prices by property for that area.

All you will have to do then is place the numbers into the rental yield calculation to work out your average gross rental yield (something we will address in the next section).

While this isn’t the specific yield on the household you’re interested in, it does show what rental income you can expect.

Usually, landlords will charge a monthly rental figure that is similar to other properties in the area. By following this Zoopla method, you will be able to get a more accurate picture of how well your property will perform in rental yield.

Up to this point, we’ve been talking about rental yield in the most basic of terms using just rent and purchase prices to calculate the rental yield percentage.

However, if you want a more accurate view of exactly how your investment will perform including any outgoings, then you will need to consider gross rental yield vs 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.

With us, you can expect to find properties with net rental yields up to 8%, which is some of the highest yield properties in UK figures.

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.

Good gross rental yields can fall anywhere between 6 and 9%. The current UK average gross rental yield is 4.66%, according to figures from HomeLet and the UK House Price Index.

What Is a Good NET Rental Yield?

After all additional costs have been accounted for, a good net rental yield should be between 5% 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.

A commonly asked question on rental yields is ‘is 4.5% a good rental yield?’ but the reality is that for the best returns, you should look for 5% at a minimum.

What Is an Assured Rental Yield?

You may have noticed that we mentioned assured rental yields earlier. Assured rental yields are some of the biggest perks of investing through a company and should be on every investor’s list of demands if they want to make the best returns possible.

An assured rental yield is a rental guarantee offered by the developer of your chosen investment.

Investing in a property with an assured rental yield allows you to receive a fixed return on your investment for a set period.

Usually, this will be at least one year.

After the assured rental yield period is over, you can still generate consistently high returns, provided you invest in an area with high rental costs and strong tenant demand.

Here at RWinvest, one of the top UK property investment companies, we offer assured rental yields of up to 8%.

If you want to know some of the best buy-to-let yields available, and a city home to some of the highest buy-to-let yields by postcode, then look no further than Liverpool.

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.

House prices in the city have grown by a whopping 13.17% between November 2021 and November 2022, yet despite this, the city still has incredibly low house prices and huge rental yields.

Liverpool was the UK’s top rental yield postcode for 2020, according to Totally Money, with rental yields available of 10%.

This excellent reputation has continued all the way into 2023, with the city now offering average yields of 6.3%.

Some of the best rental yields by postcode in Liverpool are all based in the city centre.

This includes L1, L6, and L2 which can generate yields over 8%.

Liverpool has continually exceeded in recent years for rental yield, due to incredibly low house prices which are currently just £184,447 according to the UK House Price Index. That’s nearly £100,000 below the UK average!

The Merseyside city was one of the best cities for rental yields in the UK in 2022, and you can easily find a good rental yield in Liverpool in 2023.

Average rental yields in this city even outrank many countries with the best rental yields in the world.

For example, Germany offers an average rental yield of just 3.12%.

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 £789, according to Rentoo.

Liverpool property prices are famously low compared to most other parts of the UK, with a current average value of £184,447.

You can find property for a lot cheaper than this, too, with our brand-new property The Exchange having units available from £144,950, with a guaranteed NET yield of 6% in an already-completed and tenanted development. This is a rare opportunity for property investors.

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.

In fact, in the University of Liverpool, a reported one in five students are Chinese.

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 Wi-Fi.

Providing super fast Wi-Fi is an excellent idea to boost rental income, as it is one of the most important qualities looked for in a rental property.

Those who purchase luxury and more high-end property in Liverpool could benefit from an attractive buy-to-let yield.

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 of 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!