The essential guide to understanding rental yields if you’re thinking of becoming a landlord
Thinking of becoming a buy-to-let investor? Rental yields are the first thing you should consider when investing in a new property. In order to target your investment at the postcode or street level, you need to do thorough research on the market, grasp fully the marketing trends, and lay out a meticulous action plan. Always remember that in order to make a real profit the property has to be occupied 365 days of the year.
Over the last few years, all 32 London boroughs have experienced ample property price growth, driven by extremely high levels of foreign investment. There are currently numerous regeneration projects happening in London right now, with Battersea being the largest regeneration project in Europe. Learn more about Battersea £9bn pound project here
Within the boroughs, there are certain postcodes that perform substantially better than others due to good public transport links, nearby shops, and restaurants, good schools, walkability, and proximity to London’s greatest landmarks. These factors play a significant role in estimating the average yield, however, that should not be taken at face value since there are various localised hotspots that renters usually prefer.
What is yield
The “yield” of a property tells you how much of an annual return you are likely to get on your investment. It is calculated by expressing a year’s rental income as a percentage of how much the property cost.
In other words, if the estimated weekly rental on a flat is £200, the annual rental would be 52 times that, or £10,400. And if the flat cost £100,000 to buy, then the “yield” would be described as 10.4%.
How to calculate yield
- Gross yield = annual rental income (weekly rental x 52) / property value x 100
- Net yield = annual rental income (weekly rental x 52) – annual expenses and costs/ property value x 100
When calculating yield, buy-to-let investors must note if they are calculating ‘gross yield’ or ‘ net yield’. Think about gross yield as gross earnings. Gross yield is everything before expenses, whereas net yield is after expenses. It’s really important to carefully estimate the expenses since they vary and could be repairs, vacancy costs, maintenance costs, management fees, and stamp duty. Be advised that rental income is taxed after these expenses.
What affects property yield
Property yield is heavily affected by consumer confidence, property market trends, and predictions, changes in policy, and major financial developments.
The demand for property is one of the key drivers of commercial property yield. When demand is high, the cost of buying an investment property increases. The more you pay, the less yield you get. When yields are decreasing this is often referred to as ‘hardening yields’ but when yields are softening, this means they are rising.
Yields are a measurement of expected return on your investment but potential investors take also into consideration factors such as the likelihood of finding and retaining a good, long-term tenant, maintenance and infrastructure costs, and the property location.
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