What is rental yield and how to calculate it?
As an existing landlord, knowing the rental yield generated by your property, or portfolio, is a key concept to understanding the return you’re making on your investment.
In this blog, I’ll explain what rental yield is and how you calculate it, before looking at some average yield examples.
What is rental yield?
Simply put, rental yield is the annual return you achieve from renting out a property.
Your property’s yield is the resulting percentage return your rental income is generating, tracked against the property’s original purchase price.
How to calculate rental yield
To calculate your property’s rental yield:
1. Add up your property’s annual rental income
2. Note the property’s purchase price, or current market value
3. Divide the annual rental income by this price / value
4. Multiply this figure you by 100 to give you the yield percentage
Here's an example - let’s say you purchased a new rental property for £180,000 and you charge your tenant £800 per month (£9,600 per year) in rent.
You would calculate your yield as follows:
• Divide 9,600 by 180,000 = 0.053
• 0.053 x 100 = 5.3% rental yield
What are the meaning of the terms "gross rental yield" and "net rental yield" ?
Gross rental yield is calculated based on your property’s value versus what it generates in rental income – and doesn’t factor in any costs associated with renting out a property, which would likely include:
• Letting agent fees
• Landlord insurance policies and costs to meet regulations
Taking the above into account, we would calculate the net rental yield - deducting your costs from your annual rental income, then dividing this figure by your property’s value and multiplying by 100 to give you your net yield percentage.
What is good rental yield?
Rental yields, like property prices and monthly rent figures, vary depending on where you are investing.
Generally, a gross rental yield of 5% or more has always been considered to be a decent figure, although higher yields can be found in Scotland, particularly in and around the Central Belt. Double digit yields are not uncommon in towns such as Cumbernauld, Kilsyth, Airdrie and surrounding areas.
Highest rental yields in the area
Five Glasgow postcodes made the TotallyMoney top 25 for rental yield at the end of 2020, so it’s an area an investors’ money is proven to work hard. Zoopla estimates that prices here have risen on average by around 3.0% but they still carry an average price tag of just £129,100. That’s nearly a full £100,000 less than the national mean, so it’s hardly surprising that yields are so good.
TotallyMoney reports the following average yields by postcode:
Glasgow G52: 8.71%
Glasgow G51: 7.32%
Glasgow G67: 7.20% <-------- Yes our very own Cumbernauld was third overall for the region.
Glasgow G32: 7.13%
Glasgow G21: 7.10%
Looking ahead, rental growth will likely continue to rise in tandem with the region's economic fortunes, which are improving thanks to investment in a number of high-tech sectors. These include:
Engineering and design
Financial and business services
Higher and further education
Low carbon industries
Glasgow and the Central belt has an economy worth around £43 billion and was recently named top large European city for foreign direct investment (fDi Intelligence 2020/21). The Glasgow Economic Strategy aims to make Glasgow “the most productive major city economy in the UK by 2023” and seeks to create 50,000 new jobs by 2023.
The current local rental market
Tenant demand was 41% higher in February 2021 than during the same period in 2020 – with Zoopla putting the rise, in part, down to sellers moving into rental homes while they search for their next property to buy.
As always, if you're an existing or potential investor looking for assistance with managing or creating a portfolio, Yendor Homes are happy to provide free, expert advice and guidance. We also offer some of the lowest management fees for investors and landlords in the area, so contact us today to find out more.
Stay safe and until the next blog post, happy yielding!