What Is Rental Yield and How to Calculate It: A Beginner's Guide
Rental yield is one of the most important metrics for property investors. It is the return on investment that a property investor can expect to receive from a rental property, expressed as a percentage of the property's value. In this beginner's guide, we will explain what rental yield is and how to calculate it.
What Is Rental Yield?
Rental yield is the annual rental income received from a property, expressed as a percentage of the property's value. It is a measure of the return on investment that a property investor can expect to receive from a rental property.
Rental yield is an important metric for property investors because it helps them to compare the potential returns of different investment properties.
How to Calculate Rental Yield?
Rental yield can be calculated in two ways: gross rental yield and net rental yield.
Gross rental yield is calculated by dividing the annual rental income by the property's value and then multiplying the result by 100. The formula for gross rental yield is:
Gross rental yield = (Annual rental income / Property value) x 100
For example, if a property is valued at £200,000 and the annual rental income is £12,000, the gross rental yield would be:
Gross rental yield = (£12,000 / £200,000) x 100 = 6%
Net rental yield takes into account the expenses associated with owning and maintaining a rental property, such as property taxes, insurance, maintenance and management fees.
It is calculated by subtracting these expenses from the annual rental income, dividing the result by the property's value, and multiplying the result by 100. The formula for net rental yield is:
Net rental yield = ((Annual rental income - Expenses) / Property value) x 100
For example, if a property is valued at £200,000, the annual rental income is £12,000, and the expenses are £2,000, the net rental yield would be:
Net rental yield = ((£12,000 - £2,000) / £200,000) x 100 = 5%
What Is a Good Rental Yield?
The rental yield that is considered "good" depends on the location and the type of property. Generally, a rental yield of at least 5% is considered good for residential properties in the UK.
However, rental yields can vary widely depending on the location and property type. For example, properties in prime locations or high-end properties may have lower rental yields than those in less desirable or lower-priced areas.
Final Note
Rental yield is an important metric for property investors because it helps them to compare the potential returns of different investment properties. It can be calculated in two ways: gross rental yield and net rental yield.
A good rental yield depends on the location and the type of property, but generally, a rental yield of at least 5% is considered good for residential properties in the UK. Factors affecting rental yield include location, type of property, rental market conditions and expenses.
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