Whether you’re a professional landlord seeking to make a business out of renting out property, or you have found yourself ‘an accidental landlord’, what you decide to do with your property will depend upon the likely rental yield you can make from it.
Many of Britain’s landlords end up with a property they have bought through a conventional mortgage, but have decided to hold onto it and rent it out after a change in circumstances, such as moving in with a partner. Therefore the accidental landlord may need to weigh up carefully the costs involved in maintaining that property to the potential rental income it can make. Meanwhile the professional landlord will generally seek to make the maximum return they can on their investment.
So how does one calculate the rental yield on a property? Let’s assume that you are purchasing a property for the purposes of a buy-to-let investment.
The first thing to do is your research. Approach lettings agents or review comparable properties in a similar area to get an idea of how much rent that kind of property can attract. It’s important to be realistic about about what you can charge. Over-estimate the amount and you risk estranging potential tenants, or they may not stay very long, which can cost you more in the long term if your property remains empty.
You can use this example to work out your rental yield and adapt these figures for your own.
First add together how much your property costs to buy (say £150k), plus stamp duty (1.5k), plus any renovation costs and closing fees (£10k). This brings your total outgoings to £161,500.
Now assume your annual rental income for your particular property is £15k. Divide this figure by your outgoings (above) and you get 0.093%. Multiply this figure by 100 and you get a gross rental yield of 9.3%.
This is the bit that will help you to decide whether or not yours is a sensible property to invest in. First work out how much your annual expenses will be by adding up how much it costs to run your property (insurance, agency fees, advertising your property, etc.). Let’s assume this amounts to £700.
Now subtract this figure from your annual rent of £15k and divide it by the total cost of your property (£161,500 - above). Next multiply the result by 100 for your net rental yield percentage. The percentage in this example is 8.9%. Now you need to decide how to plan ahead and manage the property to allow for any other expenses that might emerge.
Having completed your calculations, it’s a good idea to factor in a contingency in case you have to spend more money on your property investment than you expect, or in case your property is empty for a period. Your aim will be to maximise the profit you can make on your buy-to-let without negatively impacting the tenant, who will simply look elsewhere if you overcharge on rent or cut corners on maintenance.
If you look after your property then you stand more chance of increasing your rental yield by attracting happy tenants who want to stay there, and that means less advertising costs, lower letting agent fees, and fewer rent-free months.
Looking after your buy to let goes beyond calculating your rental yield, which might alter depending upon changing market forces. A quick search online will introduce you to fairly useful buy-to-let profit calculators you can revisit, which will help you to keep an eye on your profit margins.
Of course, there are other ways to ensure your investment stays healthy, one of which is to take out the right level of landlord’s insurance cover for your property or properties, which is different to the insurance you take out for your own household. Find out more about flexible cover and get a quote today.