How to Work Out Rental Yield?

Whether you have one property or multiple on your books, knowing how to work out rental yield  is something that a landlord should not overlook. Rental yield is a percentage figure and shows the revenue that you earn, or can expect to earn, from an investment.

Landlords and property investors alike use rental yield to measure the value of their investments and to find out the return on their capital outlay. It can be affected by a fluctuating housing market, property prices, interest rates and demand growth. But how exactly do you work the rental yield out?

How to work out rental yield: the calculations

The most basic formula for working out rental yield is very simple. You take the monthly rental income amount or expected rental income and multiply it by 12. Divide it by the property’s purchase price or current market value and multiply this figure by 100 to get the percentage.

Let’s say, for example, that your monthly rental income is £2000. Your annual rental income is £24,000 (£2000 x 12). You purchased the property for £250,000. Your rental yield is 9.6% (£24,000 ÷ £250,000 x 100). The above calculation is how you would work out your gross rental yield. Gross rental yield refers to the income before expenses. Net rental yield, on the other hand, is everything after expenses.

Gross vs. net rental yield

It’s important to know that there is a difference between gross rental yield and net rental yield, and to know which one to refer to when you’re looking at how to work out rental yield. 

Gross rental yield 

Gross rental yield looks at the revenue before taking into account the mortgage payments or any costs involved with maintaining the property. It is also a quick way to assess the housing market before making decisions. 

Net rental yield

Net rental yield, on the other hand, gives you a more detailed picture when looking at how to work out rental yield. Net rental yield factors in expenses like landlord insurance, repairs, and any void periods you may have. So, this will give you a more accurate reflection of the actual revenue earned after you’ve paid your expenses. 

How to calculate rental yield with formulas

So, as we now know, calculating rental yield involves comparing what you earn annually from rental income against the value of the property. If you are trying to estimate your potential income before buying, start by determining how much your house would rent for. 

Here are the formulas you need to be using for the two different types of rental yield: 

1. Gross rental yield formula

Gross Rental Yield = (Annual Rental Income divided by Property Purchase Price) x 100

2. Net rental yield formula

Net Rental Yield = (Annual Rental Income – Annual Running Costs) divided by Property Purchase Price x 100

Step-by-Step Calculation Pathway

Here’s what the calculation would look like in real terms if you purchased the property for £250,000 and your monthly rent was £1,250.  

1. Calculate Total Annual Rent: Monthly rent × 12.

Multiply your monthly rental income by 12 (or weekly rent by 52) to establish your total gross income for the year. So that would look like: 

15,000 divided by 250,000 x 100 = 6% 

2. Itemise Annual Expenses (For Net Yield): Sum up running costs.

Add up all yearly operating costs associated with the property, including insurance, agency fees, maintenance, service charges, and an allowance for empty periods. For example: 

Step 3: Calculating Net Yield

       3. Divide Income by Property Value: Apply the mathematical formula.

Subtract your annual expenses from the annual rent (if calculating net yield), divide that total by the property’s purchase price or current market value, and multiply by 100 to get a percentage.

Net Annual Income: £15,000 – £3,595 = £11,405

Net Yield = £11,405 divided by £250,000 times 100 = 4.56% 

As this example demonstrates, while the gross yield appears to be a strong 6.0%, ongoing running costs reduce the true operational return to 4.56%.

When it comes to investing in property, achieving a good rental yield is important. Before you purchase a buy-to-let property, you will need to work out what to charge in rent to make your investment worthwhile. If your income falls short of your expenditure, then you lose money. Even if you are breaking even, you are still not bringing in any profit. Plus, if your income doesn’t leave some wiggle room for emergencies such as a broken boiler or leaky roof, then you can find yourself struggling financially.

What is a good rental yield?

A good rental yield is usually considered to be between 5% and 8% or more. Any less than that, and you may find that there is not enough cash flow in the property to cover running costs, mortgage payments and unforeseen emergencies. Low rental yields simply do not make much financial sense.

It is also important to consider the area that you are investing in. Some areas have higher rental demand, and in turn, tend to return a better rental yield. A study by Property Investment UK revealed that the top 10 areas in the UK offering the highest rental yields are:

1. Newcastle (9.7%)
2. Leeds (9.6%)
3. Hampshire (9.0%)
4. Nottingham (9.0%)
5. Southampton (9.0%)
6. Swansea (8.8%)
7. Aberdeen (8.6%)
8. Hull (8.4%)
9. Bristol (8.2%)
10. Glasgow (8.1%)

However, it’s not just rental yield that needs to be considered when making a property investment. You should also take a good look at capital growth and tenant demand. If you only consider rental yield, you may still end up taking on a property with no sign of house price growth, or you may struggle to find suitable tenants.

Ultimately, a good rental yield should allow you as a landlord to make a reasonable return on investment. Being aware of your rental yield allows you to have a clear picture of your annual rental income and helps you to work out your return on investment in many different aspects of your buy-to-let. 

Rental yield vs. ROI vs. capital growth

To be able to develop a property strategy that is profitable, you’ll need to look at rental yield as a standalone figure. Savvy investors will look at weighing their rental yield against two other metrics: 

Rental yield vs. Return on Investment (ROI)

Rental yield assesses the return according to the property’s full market price, whereas ROI evaluates the cash-on-cash return based on capital you have invested. For example, deposits, taxes and legal or renovation fees. When utilising a mortgage, your ROI can often significantly outperform the rental yield.

Balancing yield and capital growth

You need to keep in mind the type of property you invest in and how much money you purchased the property for. For example, a property providing you with a net rental yield of 9% could be located in an area with flat price growth. 

On the other hand, if you invest in an apartment situated in an affluent or up-and-coming area, you may only yield 4% in rent but increase in value over a few years. So, a healthy portfolio balances your monthly cash flow with long-term capital growth.

If you are beginning your journey as a landlord, take a look at our guide on property investment for beginners.

Protecting your net yield from unforeseen costs

Unexpected costs will have a negative effect on your rental yield, for example, sudden maintenance costs, rent arrears, or accidental damage. This can easily erase a year of profit. 

As a landlord, there are several costs to stay on top of – one of them being landlord insurance. If you haven’t taken out a policy already, we suggest you do, as it can protect you against fire, theft, loss of rent and more. With CIA Landlords, you can compare landlord insurance to find the best cover for your needs. Get a quote today.