What is Considered a Good Rental Yield?

Understanding Rental Yields & Calculating Your Return on Investment

As a buy-to-let landlord, there are two primary ways to generate income: capital appreciation, which comes from an increase in the property’s value, and rental income from tenants. Striking a balance between these factors is key to achieving a strong rental yield.

In this article, we’ll discuss what’s considered a good rental yield, covering everything you should know before making a property investment.

What is Rental Yield?

Rental yield is the potential return you are expected to make on a property you own through rent. It’s a percentage figure that can be calculated using the annual rental income and the value of your property.

Both investors and landlords will use rental yields to monitor the value of their property investments and portfolios. This percentage can be affected by factors such as a fluctuating house market, property prices, interest rates and an influx in rental demand.

How to Calculate the Rental Yield of a Property

When investing in property, it’s important to understand the two main types of rental yields: gross rental yield and net rental yield. 

Gross rental yield gives you an overview of your rental income in relation to property price, without factoring in any expenses. Net rental yield, on the other hand, reveals your actual returns after accounting for all expenses related to the property.

Gross Rental Yield

Gross rental yield is a simple calculation of your rental income against the property’s purchase price, before any costs are deducted.

To calculate the gross rental yield:

1. Multiply your monthly rental income by 12 to find your annual income.
2. Divide this annual income by the property’s purchase price.
3. Multiply that figure by 100 to get a percentage.

For example, if you purchase an apartment for £200,000 and the current rental rate for the area is £1000 per month, the total annual rental income would be £12,000. This gives you a rental yield of 6% (£12,000 divided by £200,000 is 0.6%).

Net Rental Yield

Net rental yield takes it a step further by considering the costs of owning and maintaining the property. This gives you a more accurate picture of your investment’s profitability.

To calculate the net rental yield:

1. Multiply your monthly rental income by 12 to get the annual income.
2. Subtract your annual costs (such as mortgage payments, insurance and taxes).
3. Divide the result by the property’s purchase price or current market value.
4. Multiply that figure by 100.

Using the same £200,000 property with an annual rental income of £12,000, let’s say your total annual expenses come to £4,000. To calculate the net rental yield: (£12,000-£4,000) divided by £200,000 = 0.04. Multiply this by 100, giving you a 4% net rental yield.

What is Considered a Good Rental Yield?

There isn’t a strict rule for determining what a good rental yield is, as it largely depends on the location and type of property you own. However, as a general benchmark, a rental yield of 5% to 6% is typically considered strong, while anything above 6% is particularly good for buy-to-let investments.

Rental yields can vary across different regions. In areas with high property prices, yields may be lower, as rising house prices - driven by the potential for capital gains - outpace rent increases.

As of October 2024, the average rental yields for residential properties in the UK by region are as follows:

• North East:strong> 7.65%
• Scotland: 7.48%
• North West: 6.66%
• Wales: 6.43%
• Yorkshire & Humber: 6.38%
• Northern Ireland: 6.11%
• West Midlands: 5.95%
• East Midlands: 5.84%
• South West: 5.37%
• South East: 5.34%
• East of England: 5.28%
• London: 4.93%

Why is Rental Yield Important?

Achieving a good rental yield is incredibly important for inventors as it allows you to:

• Assess the performance of an investment.
• Ensure rental income will cover or exceed expenses.
• Allows you to compare different properties and markets.
• Helps you navigate tax implications related to rental income.
• Diversify your portfolio.

What Else Should I Consider When Buying an Investment Property?

While rental yield is an invaluable tool for comparing investment properties, it shouldn’t be the sole factor in your decision-making process. Other important considerations include:

• Location

Before purchasing an investment property, thoroughly research the areas you’re considering. Start by analysing the rental yields, demand for rental properties and potential for capital growth. 

Focus on areas with strong future price growth forecasts and a solid track record of consistent property value appreciation. Look at historical data for market trends, including average property prices, population growth and the local economy. Consider the proximity to amenities such as public transport and employment hubs, as these can influence both tenant demand and property value.

• Is Being a Landlord Right For You?

Buying a rental property can be profitable and rewarding both in the long and short term, with the ability to start earning passive income from your very first investment. While it may be a time-consuming process to start with, the benefits of becoming a landlord far outweigh the cons. However, it’s essential to carefully assess whether this investment path aligns with your goals before making any commitments.

• Your Investment Goals

Your investment goals will directly influence your risk tolerance and the type of property you should invest in. They can help you determine whether to prioritise long-term appreciation, steady rental income or short-term profits. Your goals also shape your financing strategy, tax considerations and set realistic expectations for returns.

Ask yourself:

→ How much time do I want to commit on a monthly/yearly basis?
→ How much risk am I willing to take on? 
→ Would I prefer having someone to guide me through the process? 
→ Will this investment make up my annual income or will it be a smaller sum on the side?

Let us be Your Guide

Now you know what’s considered a good rental yield, why not start building your portfolio? 

At Redmayne Smith, we’re proud to offer award-winning property investment opportunities to both aspiring and seasoned landlords across the country. With a range of high-quality buy-to-let properties to choose from, in cities experiencing rental yields of over 6%, we’re sure to have the right property to suit your investment goals. 

To find out more about how we can assist you in securing a lucrative investment opportunity, please get in touch. Call us on +44(0)1302 898807. Alternatively, book a consultation call with one of our knowledgeable team members today.