If you’re interested in buying an investment property or you’re an experienced property investor who is looking for their next buy to let purchase, understanding rental yields is a necessary part of your investment. Without knowing about the average rental yield of your potential investment property, you’ll struggle to distinguish a good investment from a bad investment during your property searches. If you’re keen to get the most out of your buy to let investment and want to find answers to questions like ‘what is a good rental yield?’ and find out how to work out a property yield in the best way, take a look at the tips and advice in this helpful rental yields guide.
What is a rental yield?
A rental yield is the percentage of return on investment that a property investor receives through rental income. This percentage will tell you how much money you are making, or will make, from your investment which, is why rental yields are used to work out a potential buy to let income.
Rental yields can be assured for one year or more depending on the developer. Those exploring the property market and looking for their next investment opportunity will usually pay a lot of attention to rental yields as they reveal the potential return on investment that will be made. Some investors will search for the best rental yields in the world, while others prefer to look throughout the UK for a property with the best buy to let yield.
The importance of rental yields
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 benefit from a cash flow of rental returns. Therefore, ensuring that you generate high rental returns is essential if you want to maximise rental income and avoid losing money.
However, while they are important, rental yields aren’t the be-all and end-all of a buy to let investment. The best investment strategies don’t just focus on yields, but also factor in other elements like capital appreciation and tenant demand. Imagine you purchase a property with a rental yield of 8 per cent. This is all well and good, but when you look at the postcode of the property, predictions show no signs of house price growth for the future. You also struggle to find suitable tenants for the property, leaving you victim to a loss of rental income. Without investigating levels of demand and potential capital growth for the property, you won’t feel the full benefit of the investment, no matter how high the rental yield.
How do you calculate yield on rental property?
To work out rental yield, you need to take the expected yearly rental income for a specific property and then divide this figure by the total purchase price of the property. You then need to take this figure and multiply it by 100 to reveal your 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 as you will already know how much you generate in rental income per month and can work out an accurate yearly figure. To find out the rental yield of a property you haven’t yet purchased, there are different things you can do. Many property investment companies state the potential rental yields of the property they’re advertising, while some will simply advertise an estimated rental value for the property. If this information is unavailable, try researching average rental yields for the area that the property is based in. You could also look at the current rental price for a select number of similar properties in the area, dividing the yearly figure by the house price.
If you’re in the process of buying an investment property and taking some time to shop around for the best opportunity, you could create your own rental yield calculator in excel. For this, all you would need to do is create a spreadsheet using numerical formulas to instantly multiply and divide each figure. This way, you’ll have your very own rental yield formula set up which will allow you to work out a yield for multiple properties at once. Alternatively, if you only need to check the yield of one or two select opportunities, you could use a buy to let yield calculator to help you discover the final percentage quickly and easily.
What’s the difference between gross rental yield and net rental yield?
Gross rental yield is everything before expenses. When you work out yield on rental property, this is the most common type, focusing on the property price and rental income. Net yield is everything after expenses, and factors in any additional fees and charges that come with property investment.
A net rental yield figure is a lot more accurate than a gross yield as it takes into account all the extra costs that buy to let investors face. Added costsinclude things like maintenance if your property needs it before the tenancy begins, agent or management fees if you use a letting or managing agent, mortgage payment costs if you purchase the property with a buy to let mortgage, and taxes like mortgage tax and stamp duty. 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, you could account for a month or two of rental loss when working out your net rental yield 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 RW Invest, we work out this information for our investors by providing details on the net income for each of our investment property 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 rental yield?
As a rule of thumb, anything above 5 or 6 per cent is generally considered a good rental yield for an investment. However, the ideal yield differs between residential and student investments. A minimum of 6 per cent indicates a smart investment for residential property, whereas, for student accommodation, a rental return of 8 per cent is considered a strong rental yield.
This high ﬁgure for student property is due to the reliability of tenants to provide a stable rental income. They 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. Despite this, high levels of demand allow rental costs to remain high, generating a high rental yield for the investor.
Residential property yields are also capable of reaching some very high figures, such as our Hollywood Manchester apartments with a net rental return of 8 per cent. However, since residential properties tend to come with higher property prices, achieving higher yields can sometimes be more difficult than with student apartments.
How to maximise rental yield on a property
To maximise your properties rental yield, the obvious step to take would be increasing the monthly rental costs before you find your next tenant. To justify this, you might need to update the property to add some market value or offer competitive qualities such as making your property pet-friendly.
The only way to increase rental yields is to make your rental property more attractive to tenants in order to raise monthly rental costs. 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. It’s worth keeping this in mind before you make your first buy to let investment as properties with these features are likely to see a lot of demand and generate larger amounts of rental income. If you’re using a management company to help you find tenants, utilising these qualities in your property will make the property managers job easier too.
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.
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. London, for instance, generates average yields of 3.05 per cent due 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 is said to bring in a rental yield of 4.61 per cent which is more than half the amount of some of the north-west’s top-performing yields. Let’s take a look at some of the best areas in the UK property market for those who want to find the best rental yields when investing in property.
Liverpool rental yields
Located in the north-west, Liverpool is one of the UK’s top buy to let cities. Not only does Liverpool have a high rate of property growth due to extensive regeneration, but the city also has one of the highest average yields on rental property based on current statistics. In Liverpool as a whole, rental yields stand at 5.05 per cent on average, while certain postcodes such as L6 boast some whopping yields of up to 14.99 per cent. Some of the other best rental yields by postcode in Liverpool are all based in the city centre, including L1 with yields of up to 13.63 per cent, L3 with potential yields of 11.59 per cent, and L2 which generates yields of 10.48 per cent. Average rental yields in this city even outrank many countries with the best rental yields in the world 2018, such as Germany with an average rental yield of 3.99 per cent.
Why does Liverpool have some of the strongest rental yields by city?
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 seen rental price growth of 2.65 per cent, resulting in an average monthly rental cost of £827 in Liverpool according to Zoopla. Liverpool property prices are famously low compared to most other parts of the UK, with an average of around £130,677 and some properties such as our Sky Gardens residence being priced from as low as £55,995 with net rental returns of 7 per cent.
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 studentsseeking 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.
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 over those in Liverpool, at 5.55 per cent. The M6 and M3 postcodes, spanning the Salford area, generate yields of 7.43 and 7.89 per cent, while the M14 postcode brings in yields of 11.25 per cent. Pair these fantastic yields with an expected 22.8 per cent 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 £173,381, with a huge 5.76 per cent 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 value to rise.
The average rent in Manchester, according to Zoopla, is £1,087 per calendar month. Rental costs can vary depending on the area, and spots like Manchester city centre and Salford tend to be higher. The average monthly cost for a one bed flat in Manchester city centre is £890, while the Salford average for a one bed flat is a little lower at £658. 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 Bridgewater Wharf property, based in Salford Quays, ticks these boxes and offers up to 6 per cent projected rental yields.
Another postcode in Manchester with the best buy to let returns, the M14 postcode is 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 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. Therefore, 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!
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
Learn the answers to ‘what is a rental yield’ and ‘what is a good rental yield?’. Rental yields are figures that reveal the percentage of rental return you will receive on your investment. 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.
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. 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!
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.
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. 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.
Levels of demand
Pay close attention to levels of demand in both the area of the investment and for the property type itself. 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.
The data we used
The information used in this rental yields guide was taken from a range of sources. For average rental yields in Liverpool, Manchester and London, we used the buy to let comparison tool from Go Compare and the buy to let hotspots tool from Thomas Sanderson. The average property value in Liverpool and Manchester was found on Zoopla, along with information on the average current price for rental costs.