Rental yield explained
There are a number of financial terms that you need to be aware of when letting a property. You may think that the demand for property ensures that renting out property is a simple and straightforward way to make money, but like any investment or business opportunity, you need to do the sums and plan ahead.
This is why you need to consider the rental yield. The rental yield is used to compare and contrast the income-earning properties and it is a good way to work out the rate of return from your investment. You will find that estate agents and experienced landlords will use these calculations to ensure that they make the right decisions in the rental market, and you should be able to calculate the rental yield as well.
Work out the total costs of your property
You should write down all of the costs involved with the purchase of the property, which can include:
- Property price
- Stamp duty
- Any renovation or repair costs
- Closing fees
- Any other fees
Calculating gross rental yield
Once you have your total cost of buying your property, you should take the level of rent you will receive in a year and then divide this by the total cost of your property. Once you have this figure, multiply it by 100 and this will provide you with the gross rental yield percentage.
Calculating the net rental yield
The next step is to calculate the net rental yield and this will let you work out whether investing in the property is a smart move. If the findings show that you are paying too high an amount for the property, you may want to discard it.
To obtain this figure, take your annual rent and then subtract any costs and expenses you have in maintaining the property. Once you have this figure, divide it by the total property cost and then multiply it by 100 to obtain your net rental yield percentage
You will generally find that properties have a net rental yield based between 3% and 8%, depending on the location, and this is something that you should bear in mind. Obviously you want to obtain as high a rental yield as possible but your level of comfort or happiness will depend on your own outlook on life. Some people are more risk averse than others, some people will only be interested in an investment if there is a certain level of return. This is where you need to think about what you are happy with when it comes to investing and then determine what you should do.