Rental yields have always been an extremely important metric when seeking an investment or letting a current property and are key to making a sound financial decision.
With the housing market in London currently being outperformed by other regional towns and cities, a growing number of property investors, including buy-to-let landlords, are turning elsewhere and the Midlands is appealing as an area with massive current and future potential for growth.
There has been a period of investment with a number of new and large companies arriving and setting up operations, attracting skilled workers looking for decent accommodation.
That has alerted many landlords and potential landlords to lettings opportunities, but before they make the big decision to rent out their property they should consider the potential rental yield, explains HM Lettings Operations Manager Stephen Reade.
What rental yield should a landlord expect?
The rental yield is the measure of the income generating capacity of a residential investment. The gross rental yield is the simple relationship between capital value and the annual rent generated.
Take for example a £100,000 studio apartment generating a monthly rent of £600 or £7200 per annum. The gross rental yield on that apartment would be 7.2%. Gross rental yields are useful because they allow property investors to directly compare residential investments against each other using a simply generated figure.
If you are speaking to a mortgage lender about a buy-to-let investment, then this is the rental yield that they normally talk about.
It’s also generally the case when research discusses buy-to-let yields in towns or cities. This is what’s known as the ‘gross yield’. This means that it doesn’t take into account the costs associated with owning a property and renting it out to tenants or using a managing agent.
As such, although it’s helpful for landlords to provide a ballpark figure, its failure to account for costs is problematic. As such, you have to try to calculate a ‘net yield’, which is sometimes also referred to as a ‘true yield’. This accounts for all of your costs and gives a more accurate reflection of the money you’ll receive.
The costs to consider and factor into your plans are:
- Insurance premiums - The premium amount will vary depending on the size of the property, the property type and its location.
- Replacement of broken fixtures and fittings - At the end of each tenancy, it’s likely there will be worn out fixtures and fittings.
- Maintenance - You’ll also need to factor in maintenance costs. The type, age and condition of the property will all affect the level of maintenance required, so keep this in mind when selecting your property.
- Ground rent - If the property is leasehold then you’ll also have to factor in ground rent and service charges.
- Empty periods - There’s a good chance that your property won’t always be occupied. Periods without tenants are known as ‘void periods’ as there’s no rent coming in. Factor in this possibility, and even account for as much as a month’s rent just in case. If you buy well and set the rent appropriately, this shouldn’t be a problem for long.
- Agent fees - If you use a letting agent or a managing agent, you’ll have to pay a fee. This could include marketing, advertising, property management, referencing and inventories. It depends how much you’re asking the agent to do.
- Mortgage - This, of course, will usually be the largest sum you have to part with.
Once you’ve deducted all of these costs, you’ll have found your ‘net yield’, with the costs deducted from your rental income. So, if you divide this into the value of the property, including all the costs associated with buying the property, you’ll have the net rental yield.
Calculating a yield can be a complex process and it’s different for each of your properties. Also remember to check and reassess this amount regularly as it’s likely to change if, for example, you alter the level of rent or pay some money off your mortgage.