Buy-to-let Landlords

Money’s too tight to mention!

October 26, 2021
Information published was correct at the time of writing

Increasing the rental yield of your investment property is key

For budding property investors and those already experienced in the field of investment properties, one of the most important questions when looking for a suitable investment should be ‘what is the rental yield?’

Making sure you know the rental yield for your property is essential. It’s a key measure when comparing different properties within your portfolio, plus it can be a useful target when considering future investments. The average rental yield landlords received highlighted in a recent survey rose to a three-year high of 6% in the first quarter of 2021. After a difficult 2020, in which many landlords suffered from the closure of the property market, a suspension on evictions and a rise in rent arrears, this is a positive sign of recovery.

Rental yield is the measure by which we express return on investment in the private rented sector. It is calculated by deducting all of the costs of letting a property (mortgage payments, agent fees, maintenance, et cetera) from the rental income it achieves and expressing that figure as a percentage of the initial cost of purchasing the property. There are two ways of calculating yield. Gross yield is a calculation which looks at the value of the property when it was purchased versus the rent usually received.

So, for example, if a property was bought for £250,000, and the rent is £1,000 per month then the yield is 4.8%; that’s because £12,000 rental income divided by £250,000 expressed as a percentage is 4.8. However, this rather basic calculation doesn’t consider the other costs that a landlord may have to pay out. Therefore, calculating the true, or net, rental yield will include incorporating the additional costs you have to pay. These costs include fixed and known costs such as mortgage repayments, leasehold costs and insurance premiums.

Rental yield is considered one of the key metrics of success when letting a property. That’s because the rental income alone isn’t a reliable indicator of profitability. Even if the rental income of a property is £50,000, if the costs are £45,000, it is not generating a great deal of profit. The rental yield would likely show this more accurately. But rental yield isn’t the only metric for success. It’s also important to consider the gains you will make by selling the property in the future if the sales price has increased since you bought it. As a property investor, you should look at both.

Rental yield balances three factors: your rental income, your costs and the price of the property. So, by changing any of those figures you can increase your rental yield. When buying a new property, it’s crucial to negotiate the best possible price for it, as every additional pound you pay cuts into your rental yield. Buying in an area where demand is rising for private rental properties will ensure that you can achieve the optimal rental income relative to the purchasing price. You can also increase the rental income achievable from your property by carrying out improvement works. Adapting to changing lifestyles is one way to improve your property, for example, by installing a faster internet connection and creating a dedicated home office space.

Extending a property to add an extra bedroom would be another way to increase the rental income. Maintaining a good relationship with your tenants can help you retain them at the end of the tenancy to avoid vacant periods and the costs of relisting the property. And there are many other ways to cut costs marginally, which can have a big impact overall. Finally, lowering your costs will improve your rental yield. Remortgaging at the end of a fixed-rate period on your mortgage could save you thousands each year.

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