As an experienced landlord knows, paying close attention to your rental yields is of paramount importance when managing a property. After paying for expenses such as maintenance costs, administrative costs, letting agent fees and of course a mortgage, you still need to be making a profit.
It’s no wonder then, that many landlords often find themselves asking “what is a good rental yield?” That’s why it’s crucial for landlords to have an understanding of what a healthy rental yield is when they are managing a rental property or are thinking of investing in one.
Here are some quick tips to help you get started.
Put simply, a rental yield is the amount of profit that is left for the landlord after they have deducted the relevant expenses associated with running their property.
The rental yield is the percentage of the total rental income divided by the total amount that you’ve invested in your property annually.
If your rental yield figure is in the red, then you will be losing money on your property investment, but despite this obvious fact, it’s not always easy to arrive at a positive figure that allows you to pocket the difference.
It’s worth understanding that some expenses won’t be accounted for by the rental yield calculation. Expenses which fall under ‘fair wear and tear’, such as replacing furniture and costs involved with the upkeep of the building’s exterior, will not always be able to be included when working out a property’s rental yield.
You need to ensure that your rental yield leaves you enough ‘wiggle room’ for any hidden potential costs, as well as ensuring a healthy return to make your property investment worthwhile.
Rental yield is calculated as a percentage. The amount of annual money you receive in rent is divided by the total quantity of money you spent on the property, multiplied by 100.
If, for example, your annual rent is £18,000 and your property itself cost you £180,000, then your annual yield would, therefore, be 10 per cent.
A good rental yield is typically a little over eight per cent and anything much higher than this figure is a definite boon to your investment. Eight per cent is considered the lowest figure that a landlord should receive in their rental yield, as this ensures that all outgoing costs are covered but also leaves a little left over to set aside for a rainy day.
Anything less than this figure will mean that you will struggle to make all of the important payments that are associated with running a rental property and you could even be in danger of losing money.
Although it might be tempting to set your rent price at a rate which will offer a higher rental yield, in order to minimise the risks of losing profits, this practice can backfire. Some landlords have inadvertently priced themselves out of their local rental market, which has resulted in a lengthy void period, leaving them struggling to find tenants and financially worse off than having a low rental yield.
Renters are known for doing their research when viewing properties and they can tell when a rental price is too expensive, because they carry out price comparisons in the areas they are looking to move to. A good landlord will take this into consideration when determining the price of their rent, as well as leaving enough of a rental yield to secure a profit from their property investment at the end of the year.
If you’re looking to save money as a landlord, one of the biggest expenses is often the letting agent fees that agencies charge to find your tenants and maintain your premises.