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Whether you’re stepping into the realm of property investment or expanding your real estate portfolio, understanding rental yield is a fundamental aspect of making informed decisions. This guide offers a comprehensive overview of what rental yield entails, its significance, calculation methods, the distinction between gross and net yield, determining a good rental yield, maximising yield, and the concept of capital growth.
Rental yield is a pivotal concept for landlords and investors, providing insights into the potential returns a property can generate through rent. It is expressed as a percentage and is calculated using the property’s annual rental income in relation to its value. In essence, rental yield reflects the profitability of an investment property in terms of rental income.
Rental yield serves as a compass for property investors, guiding their decision-making process. Before acquiring a buy-to-let property, assessing the desired rent helps determine if the investment is financially viable. Other factors, such as equity growth prospects, tenant demand, and ease of property disposal, should also be considered.
Understanding the distinction between gross and net rental yield is crucial:
This calculation encompasses the total income generated by the property before deducting expenses. It is favoured when specific property costs are unknown, making it a preferred choice for many mortgage lenders.
This calculation provides a more comprehensive view by factoring in property expenses. It considers the annual rental income minus ownership costs such as mortgage payments, insurance, and maintenance. Net rental yield offers a clearer insight into actual returns.
Written in August 2023 by:
Sam Chester
While there’s no fixed number that defines a good rental yield, a general rule of thumb is that anything above 7% is considered very good, and a range between 5% and 6% is seen as satisfactory.
The key is for the yield to cover property costs and yield a reasonable return on investment, a determination influenced by individual circumstances.
Maximising rental yield involves strategic steps:
Regularly assess whether your rental rates align with current market conditions. Adjustments may be possible depending on your tenancy agreement.
Houses of Multiple Occupation (HMO) can yield higher rental income, but they come with regulations and considerations. Consult with a broker before venturing into HMO investments.
Regularly scrutinise your property-related expenses to identify potential cost-saving opportunities. This may involve refinancing or finding cost-effective service providers.
Capital growth, also known as appreciation, refers to the increase in property value over time. Calculating capital growth involves:
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The content within this article is as accurate as the date it was written. To ensure the most up to date information, you should consult with one of the experts that we work with as every lender and their polices are different and can be changed or amended without notice.
This website is for information only and does not constitute financial advice. Our mortgage advisers are all fully qualified to provide mortgage advice in accordance with the Financial Conduct Authority (FCA) regulations. We only exclusively operate with businesses that are authorised and regulated by the FCA. All advice offered will be unique to your individual circumstances.
Some Buy to Let mortgages are not regulated by the FCA. You should carefully consider securing other debts against your home. If you do not keep up your mortgage repayments, your home may be repossessed. Equity released from your home will also be secured against it.
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