Expand Your Rental Yield Knowledge.

What Is A Good Rental Yield In 2023?

What Is A Good Rental Yield?

Topics:

  • What Are Rental Yields?
  • How to Calculate Rental Yield
  • What is a Good Rental Yield UK 2023?
  • Gross Rental Yield vs Net Rental Yield: What’s the Difference?
  • What is a Good Yield for Buy to Let?
  • How to Calculate Rental Yield
  • Gross Rental Yield vs Net Rental Yield
  • Best Rental Yields in the UK
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Questions & Answers.

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So, what is a rental yield in the UK?

Rental yield is a percentage figure showing the annual return on investment on property through rental income.

Rental yield is calculated by dividing the annual rental income of a property by the original purchase price and multiplying by 100.

For example, let’s say the asking price for a buy to let investment is £100,000 and you plan to charge a monthly rent of £800.

You would first multiply the £800 by 12 for an annual rental income figure of £9,600.

Then divide £9,600 by the property value of £100,000 for 0.096. Now multiply this by 100 to show a rental yield of 9.6% for the rental property.

This is just showing the gross rental yield of a property, meaning a rental yield without including expenses. For a more accurate figure, you should work out rental yield by including net income and factoring in running costs and lettings expenditure – something we will address later on.

So, what is a good yield for buy to let property?

Generally, it’s widely accepted that rental yields above 5% are considered acceptable, with the best rental yields valued at 7% or above.

Anything less than this and you may encounter some issues.

For starters, a smaller rental yield could mean that your rental income isn’t covering your ongoing expenses, that can include ground rent, buy to let mortgage payments/ buy to let mortgage repayments, management fees, agent fees, or any other costs.

You may also encounter issues when other costs and unexpected maintenance costs arrive for your buy to let investment.

This is why, to make an effective long term investment, you need to target residential property or student property with higher rent or lower property prices to ensure you start making a profit as fast as possible.

It’s also important to note that what is a good yield for buy to let property will change depending on if it is gross or NET.

When thinking about what is a good buy to let rental yield, you need to know whether you’re looking at gross rental yields or a net rental yield.

Gross rental yields are rental yields that don’t factor in monthly expenses and are usually higher than NET yields.

A net rental yield, on the other hand, is a rental yield that does factor in running costs like mortgage payments.

For both calculations, you’ll need to know yearly rental income and the property value. However, you’ll need some extra information to calculate NET yields that may not be obviously available.

The likelihood is you’ll need to already own the property to get a full understanding of the specific costs. However, if you invest through a property investment company, some will disclose the NET rental yields instead, and may even provide guaranteed returns for a set number of years.

A good rental yield gross is commonly around 7% or 8%, while a good net yield will be 5% or above. It’s common to find some UK locations with 7 or even 8% NET yields, so be sure to shop around and research.

For buy to let property investors, rental yields are the key to a good investment.

Simply put, a strong rental yield shows just how much return on investment you will get from your real estate venture.

A low rental yield will mean your rental prices and annual rental income are lacking due to the cost of the property purchase price. This is not ideal as it will mean you may be struggling to cover the costs of expenses and will lose money.

On the other hand, a high rental yield shows you’re making a good investment and will start seeing positive returns on your buy to let property in a few years.

However, it’s important to stress that while having high net yields is ideal, the chances are that the income you generate may not cover every fee that arises. A lot can go wrong in a property investment, like unexpected costs appearing or a long void period for your property investment.

This is why you should always keep a contingency fund aimed at covering any potential costs or lapses in your rental income.

Thinking of investing in property? Learn if now is the time to invest.

What Are Rental Yields?

What Are Rental Yields?

Rental yield is a percentage figure that shows the annual return on investment you’ll earn through rental income.

Yields are important as they’ll show you how profitable an investment is before investing. But yields can be complicated as they can be split into two types; gross and net.

How to Calculate Rental Yield

Luckily for investors, calculating rental yields is easy. Here’s how:

Rental yield is calculated by dividing the annual rental income by the original purchase price and multiplying by 100.

Let’s say the asking price for a buy to let investment is £100,000, and you plan to charge a monthly rent of £800.

You would first multiply the £800 by 12 for an annual rental income figure of £9,600.

Then divide £9,600 by the property value of £100,000 for 0.096. Now multiply this by 100 to show a rental yield of 9.6% for the rental property.

This shows the gross rental yield, meaning a rental yield without expenses. You should include the net income for the most accurate figure by deducting running costs.

What is a Good Rental Yield UK 2023?

While a “good” rental yield will likely change depending on your goals and investment location, 5% yields or higher are generally considered acceptable.

However, you should be looking at 7% or more for the best rental yields. Anything less than this, and you may struggle to afford ongoing expenses.

It’s also important to note that a good yield will change depending on whether it’s gross or net.

Gross Rental Yield vs Net Rental Yield: What’s the Difference?

Gross rental yields are rental yields that don’t factor in monthly expenses and are usually higher than net yields.

On the other hand, a net rental yield is a rental yield that factors in running costs like mortgage payments.

You’ll need to know the yearly rental income and the property value for both calculations.

But you’ll need to know the running costs of a property to calculate net returns – something that can be hard to find out before owning the property.

However, some investment companies will tell you the exact NET rental yields before you buy.

A good gross yield is commonly around 7% or 8%, while a good net yield will be 5% or above. It’s common to find some UK locations with 7% NET yields, so shop around to find the best returns available.

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Where Are the Highest Rental Yields in the UK?

If you’re ready to make a property investment, research is vital.

By researching the area you’re thinking of investing in, you’ll be able to get a good idea of the type of rental income and rental yields you’ll generate from your chosen rental property.

But how can you work out the average rental yields of the UK’s top investment cities? Well, lucky for you, we’ve done the hard work for you.

Using the latest average property prices from the UK House Price Index and monthly rental prices, we’ve calculated the highest rental yields in the UK.

Southampton currently has one of the best rental yields UK-wide with an average yield of 8.79% thanks to a high annual rent.

Manchester is another top investment location and boasts one of the best rental yields in the UK at 8.75%, thanks to low average property prices.

It’s a good investment strategy to invest in any of these areas with high average rental yields.

The average UK rental yield is 4.45% gross.

This figure is quite lacklustre as despite rental prices higher than have ever been before, house prices are also at a record-high causing the average rental yield to be even lower.

For this reason, to get the best rental yields UK as a property investor, you’ll need to invest in areas with low property prices.

This is especially vital if you want to build a property portfolio and want to ensure it is profitable.

Want to learn more about property investment? View our complete guide.

How To Maximise Your Rental Yield?

Summary:

  • Target properties with strong annual rental income potential
  • Focus on low house prices
  • Choose city centre locations and apartments to attract young professional tenants
  • Consider university towns or cities for the highest returns
  • Invest with property investment companies who offer assured rental yields
  • Don’t forget about price growth for a successful property investment

So, now that you know what a good rental yield is, you may be curious how you can secure a high return for your own property.

Your first port of call will be investing in an area with a good rental yield, but it’s important to accept that just because you invest in a popular area, you’re not guaranteed to earn a good rental yield.

Instead, the type of property you choose, its specific location in the city, and how appealing it is to tenants are all vital factors to strong property investments.

For instance, student accommodation is often cheaper than traditional residential property due to its smaller size, and will typically generate a high average rental yield – although the trade-off is less capital growth than residential property.

This is why cities and locations like Liverpool and Manchester generate very high returns as they are largely university towns with a combined student population of over 170,000.

Another key factor to consider when looking at finding a property with good rental yield is the quality of the home and how appealing it is to tenants. Naturally, you’ll want to attract tenants as much as possible and avoid any void periods that can heavily impact the rate of return for a property investor.

To try and ensure tenant demand, you’ll need your property to be focused on areas of high tenant demand like city centre locations. You should also consider fitting your property with high-quality modern furnishings to be appealing to young professionals that make up the majority of renters.

Covid-19 has changed tenants and what they want out of their rental homes, with estate agents Benham and Reeves finding that the top priorities for tenants now are fast broadband, outside space, and proximity to parks.

You can see the latest preferences for tenants in the table below.

Want to learn more why you should invest in property? Read our complete guide here.

Rental Yield FAQs

For a net rental yield, 5% is an example of good yields in the UK.

However, you can aim higher, with cities like Liverpool known to provide a good NET rental yield of 8% NET.

This is because the city offers high tenant demand and low property prices.

Generally, a good buy to let rental yield is around 7 or 8% for gross returns.

However, if you’re targeting net yields that factor in expenses, a good net buy to let rental yield is anything above 5%.

A good return on a buy to let property will be over 5% when factoring in expenses. With a yield above 5% you will be able to cover expenses while generating a solid return.

The 2% rule in real estate determines how much you should charge for rent based on the value of your property. For example, if the initial investment price for a property is £100,000, you should ideally charge £2,000.

However, in practical terms, this is very rarely the case, with the average UK rent currently valued at £1,053 PCM according to HomeLet, while the average price is over £260,000.

Ideally, to ensure you attract tenants, you should try and charge rent around the average of the area and your property type. Be sure to chat to an estate agent to help you determine the rental worth of your property.

In 2020, the average buy to let rental yield for the UK was around 3.53% when properties were around £240k on average according to the Land Registry. This meant that you’d be earning around £8,400 per year on average in 2020.

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