Landlords: How To Calculate Your Rental Yield


Landlords: How To Calculate Your Rental Yield

While there are an increasing number of website options that provide you with a rental yield calculator, it is best to know how rental yield is calculated. Understanding the different elements that come together to make up the rental yield will ensure that you can make informed decisions about your yield while also helping you to tweak the elements that will provide you with an improved rental yield.

For people who are not too confident when it comes to their finances, or who are looking for a quick calculation, gross rental yield is a good starting point. In this example, the buyer purchases the property at £100,000 and receives a rental income of £500 every month. This means that the annual rental income for the property would be £500 x 12 which equals £6,000.

Taking the annual rental income and then dividing it by the purchase price and then multiplying the answer by 100 will provide the gross rental yield percentage. In this example this equates to (6,000 / 100,000) * 100 which comes to 6%.

Gross yield = (Monthly rent x 12) / value of property x 100
Gross yield = £6,000 / 100,000 x 100
Gross yield = 0.06 x 100
Gross yield = 6%

In this simple equation, the yield is the return of the investment as a percentage of what was paid bit of course, in the real world there are many other aspects to bear in mind, and this means that there are other elements to consider when calculating the net yield.

Net yield will consider expenses and fees, which means that it is a more reliable way of determining yield but because there are variables involved, it can be a more difficult process. In order to determine net yield you have to work out all of the expenses and then subtract this from the annual rental income. This figure is then multiplied by 100 to provide you with the rental yield.

The equation can be seen as:

Net Yield = (Monthly rent x 12) – costs / value of the property x 100
In this example, the annual rent remains £500, costs are £1,000 and the property remains valued at £100,000. This makes the calculation:
Net yield = (£6,000 - £1,000) / £100,000 x 100
Net yield - £5,000 / 100,000 x 100
Net yield = 0.05 x 100
Net yield = 5%

While the calculations in real life would be more complex than the example, this is the process that is followed to determine gross and rental yield. It can therefore be seen that for a landlord to raise rental yield on a property, they can raise the level of rental income or they can attempt to reduce the level of costs, perhaps by reducing the amount of maintenance work they undertake at the property.

Of course, a rise in rental income or a fall in maintenance work may turn away potential tenants, which means a landlord may not fill their property for the entire year but this is something that landlords have to consider when looking to obtain a suitable yield.

If you are looking for estate agents in Shoreditch, then welcome to Nelsons; your number one choice for lettings and property management. To speak to a member of the team please call 020 7613 1798