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What is a Good Rental Yield and How to Achieve It?

Rental yield is often cited as one of the most important elements for buy-to-let investment success. Here, we walk you through rental yield 101 and how to improve your bottom line.

Faye deGavre

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Mar 23, 2021

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5 min read

What is a Good Rental Yield and How to Achieve It?

If you’re thinking of investing in property, one of the first things you’ll need to consider in your decision making is the rental yield. Understanding this figure is not the only consideration when buying a buy-to-let property, but a very important one. This guide walks you through what rental yield is, why it’s in your best interests to calculate it and how to bolster it so you can take even more home.

Understanding rental yield for your buy-to-let property

What is rental yield? Why does it matter?

Rental yield is the money you make on an investment property by calculating the gap between your overall expenses and the income you receive from renting out the space. By understanding how to work out rental yield, you have a better idea of the ongoing return you’ll earn on the investment – and it can point you in the right direction when looking to improve your profit. 

Here comes the maths:

Gross rental yield = (Annual rental income ÷ property value) x 100

To put this into practice, say you bought the house for £200,000. You charge £12,000 a year in rent for this. (12,000 ÷ 200,000) x 100 leaves you with a rental yield of 6%

Note that this gross rental yield calculation does not take your expenses into account. All properties come with costs, such as upkeep and interest rates. 

Net rental yield = (Annual rental income – annual running costs) ÷ property value) x 100

Using the example above, say your annual expenses (loans, insurance, maintenance, etc.) are £3,000. This would leave you with a net rental yield of (12,000-3,000) ÷ 200,000) x 100 = 4.5%.

But, until you understand whether or not this is a good rental yield, this figure may mean nothing to you.

What is a good rental yield?

There is no definite ‘good rental yield’ percentage. It all comes down to each property’s region and various features. It’s easy to assume that a higher rental yield will equate to a higher return or a more significant property value, but this isn’t always the case.

For example, a high rental yield (usually considered between 8%-10%) could imply that the property is undervalued or below market price. In another instance, a property with a low rental yield (between 2%-4%) can mean it is overvalued.

Although there’s no golden number to aim for, your rental income should at least cover the running costs of the property – mortgage payments, Letting Agent fees, insurance, wear and tear. If it doesn’t, then you may find you’re dipping more and more into your contingency fund. Ideally, you’ll build up a fund to cover emergency issues that can be expensive – such as a burst pipe or a boiler breakdown – first, before paying yourself.

By and large, property investors aim to achieve a rental yield that’s between 5%-8%. Ideally, this will cover all necessary expenses and give you a decent return on investment.

Should low rental yield properties be avoided?

Properties with a high rental yield are ideal for risk-averse investors who want a steady investment that takes care of their loan repayments. A positive cash flow certainly offers peace of mind. 

However, that is not to say that you should sidestep properties with a low rental yield. Investors who are after capital growth and a long-term buy-and-hold strategy in a sustainable market could benefit from these properties. 

How to increase rental yield?

1. Make your property more attractive to tenants

Make the basics better than basic with ways to improve property value. Keep on top of maintenance to ensure the space is safe and clean. If you furnish the property, make sure the quality of the furniture is up to standard. And don’t underestimate the value of removing clutter, cleaning and giving the walls a fresh coat of paint.

2. Utilise your tax credits

We all have to pay taxes, though landlords tend not to pay too much attention to tax and how this impacts their bottom line. But this is a costly mistake. Work with an accountant who has specialist property investment knowledge and can advise you on tax reliefs you may be eligible for (such as the ‘wear and tear’ allowance). 

Allowable rental expenses are not taxed as long as they are for the purposes of renting out the property, such as:

  • General maintenance and repairs to the property (though home improvements are not included)
  • Water rates, council tax, gas and electricity (when the utilities are included in the rent)
  • Services (e.g., gardeners, cleaners, etc.)
  • Insurance
  • Letting Agent fees
  • Accountant fees

Find out more about allowable expenses on gov.uk.

3. Review your mortgage

Mortgage interest fees soak up most of the income from the majority of rental properties. Talk to your mortgage advisor about locking in a lower rate, and you can instantly start making more from your property.

4. Raise the rent

Is your rent possibly too low for the area? Make sure the amount you charge is in line with the local market, competition and the condition of the property. If you find you’re undercharging, negotiate a rent increase with your tenants. Your Letting Agent will be able to tell you if you have priced the space competitively.

5. Cut expenditures

Aside from the big expenses like mortgage payments, what else are you spending money on? Evaluate if there are any areas where you can save. We’re not suggesting you skip the annual boiler inspection. Instead, negotiate a better deal with your buildings insurer or do the painting and decorating yourself rather than calling in the pros. 

6. Go long term

Generally, the highest rental yields for regular properties tend to be those associated with long-term lets. Void periods (a time when your property is empty) can burn a significant hole in your pocket, but securing a long-term tenant will help sidestep too many of these periods, as well as save on costs associated with finding new renters. Working with a top Letting Agent can help you keep void periods to a minimum.

Find your next rental investment

At Boomin, finding your next buy-to-let property is easy with 24/7 online booking. When you have the keys to your rental property, we make it easy to work with trusted Letting Agents to find and secure top tenants. Get started on letting your property today.

Faye deGavre

Content Writer