Rental Yield Calculator – Property Investment

As a landlord, or more specifically, a new/upcoming landlord, have you ever been torn between multiple properties? I have. And so has John.

For example, John wants to be a landlord, so he’s on the hunt to buy a suitable property to rent out. John has seen 2 properties he likes. Property 1 costs 150,000 with a potential rental return of £600pcm. Property 2 costs £180,000 with a potential rental return of £775pcm. Which is the better buy?

If making money is John’s primary objective (which it almost certainly should be), then common sense dictates that the property with the highest rental yield should be the property in our cross-hair.

Table of contents

• What & Why Calculate Yield?
• How to Calculate Rental Yield (The Formula)
• What is a good Rental Yield?
• Rental Yield Calculator
• Best Rental Yields in UK
• How important is Rental Yield?
• Interested in buying a BTL and becoming a landlord?

What & Why Calculate Yield?

Yield is a way of calculating the ROI of your BTL investment.

The higher the yield, the better.

A low yield is no good.

There are different methods to calculating yield for a BTL investment, so you may get varying results depending on the formula used. But moreover, it’s important to note that when you calculate the yield will play a big role in the result you get, because the yield will change over time, and that’s because house prices, rental income and expenses are all changing variables.

Generally speaking, the yield for a BTL property investment is based on:

• Property purchase cost
• Current property value (which could be several years after purchase)

In our case, since we’re trying to determine whether a prospective property is a good investment or not, so our calculation will be based on the property purchase cost. So the formula we should use to calculate the yield: annual rental income minus annual running costs (e.g. insurance, mortgage interest payments etc), divided by the total amount invested to purchase the property (including all associated expenses e.g. stamp duty, legal etc).

The annual running costs will likely be based on guesstimates, but try to be as accurate as you can. They can include:

• Repairs and maintenance
• Ground rent and service charges (relevant for leasehold)
• Insurance
• Letting agency fees
• Utility bills payable by landlord
• Council tax

How to Calculate Property Investment Rental Yield (The Formula)

The formula:
i = investment
pc = purchase costs

mrr = monthly rental return
arc = annual running costs

Yield = (mrr*12 – arc)/(i + pc)*100

Rental Yield example 1

Investment (Property Price) = £150,000
Purchase cost (e.g. stamp duty, legal costs) = £10,000

Monthly rental return = £800
Annual running costs (e.g. letting agent, insurance etc) = £3,000

£150,000 + £10,000 = £160,000

£800 x 12 = £9,600
£9,600 – £3,000 = £6,600

£6,600 / £160,000 = 0.04125
0.04125 x 100 = 4.13 % Net Rental Yield

Rental Yield example 2

Investment (Property Price) = £225,000
Purchase cost (e.g. stamp duty, legal costs) = £17,500

Monthly rental return = £1200
Annual running costs (e.g. letting agent, insurance etc) = £6,350

£225,000 + £17,500 = £242,500

£1,600 x 12 = £19,200
£19,200 – £6,350 = £11,150

£11,150 / £225,000 = 0.0495
0.0495 x 100 = 4.96 % Net Rental Yield

Conclusion

Although Property 2 costs more to purchase, it actually provides a better ROI. However, once again, bear in mind that the yield will change over the duration of the investment for the reasons mentioned.

What is a good Rental Yield?

Many landlords consider anything above 5% a good yield, while others believe 8 is the magic number. But to be honest, it really depends on what you’d be happy with. It’s also worth remembering that the beauty of property is that it benefits from capital growth, which tends to be good at fighting inflation.

I personally believe any property which has a return yield of 6%+ is pretty sweet.

To make life easier (because that’s what I’m all about), you can use the calculator below to calculate your Rental Yield, whether it be for your current BTL, or a prospective investment…

Points to remember when calculating Rental Yield

While calculating the Rental Yield of a BTL property is relatively straight forward, there are a few points to consider:

• Void periods – ignoring void periods is a common mistake, and if you fall victim it can easily skew your calculations. When calculating the yield, bear in mind that it’s unlikely you will always have a occupied property for 12 months of the year, so the total income won’t always be 12 months x £Monthly rent. There maybe times where your property will experience void periods, whether it be in-between tenants or at the very beginning of your investment. So you may want to “stress-test” your calculations by using 11 months’ worth of rental income.
• Rent – If you’re in the midst of your research phase, and you don’t know how much rent your prospective investments can achieve, you can look on portals like Rightmove, Zoopla and Gumtree to see what other similar properties in the same area are demanding. Alternatively, you could talk to a local letting agent. However, bear in mind, the “asking price” isn’t always the amount achieved.
• Total costs – when calculating your yield, it’s important to use the real figures to get the most accurate calculations. So when using the total investment amount, it should include ALL your costs, which may include the following:
  • Cost of property
  • Tenant acquisition
  • Insurance
  • Mortgage product/arrangement fee
  • Solicitor fees
  • Survey fees
  • Any other legal fees
  • Cost of redecorating/maintenance
  • Running costs during void periods (e.g. council tax, utility bills)
  • Costs of furniture/white goods
• Be wary of yield calculations – when you hear agents or developers talk of yields they can often sound incredibly attractive, and this is when you should start asking questions. They often make their calculations based on basic cost of the property and essentially ignoring all the costs associated with buying the property (as per the list mentioned above), which obviously skyrockets the yield and makes the deal seem sweeter than it actually is! Buyer beware!

Best Rental Yields in UK 2018/2019

Totallymoney has published data on the highest buy-to-let yields in Q4 2018; they analysed data from 580,000 properties across England, Scotland and Wales.

While these are only averages, and don’t account for ‘special cases’, which include high-yielding individual gems, it does give a good indication where the highest yielding areas are.

How important is Rental Yield?

Haven’t you been being attention? It’s critical!

Essentially, you want a good yield to make your investment worthwhile, because not only will it put more cash in your pocket, but it will also be more resilient during economic downturns!

However, I do want to stress that the best rental properties to invest in strike a balance between yield, location, rental demand and capital growth (based on data)!

For example, if I had a choice between a property with a 8% rental yield in a shitty area with high crime rates and a property with a 7% rental yield in a good area, I’d go for the latter all day long.

Find the balance by taking into consideration all the essential factors!

So, what you got? What’s your Yield?

Interested in buying a BTL and becoming a landlord?

I would be remiss to check out of here without pointing all wannabe landlords towards my ‘Ultimate Guide For New & First-Time Landlords‘. Long story short, it’s a 100+ page blueprint on how to be a landlord, covering A – Z, including tips, advice, legal crap, how to find and manage tenants etc. It’s all there. Plus more.

It’s free to download, so go ahead and grab your copy from here. If you want.