When considering rental investment property you’ll likely see the property sale price advertised and if it’s an existing buy-to-let with a history of being let or a purpose-built rental property there will also be an expected yield advertised.
This rental yield might be guaranteed for a certain amount of time which means you won’t have to immediately worry about the rental income
What is rental yield?
Rental yield is the percentage return an investor is likely to achieve on a property through rental income.
The rental yield is calculated by taking the annual rental income of a property and dividing it by the property price.
This percentage figure is important when considering a rental property to purchase as it provides an idea of the margins you’re working with. The expected level of capital growth is also important but that is long term and speculative. Rental yield is usually more immediate income and should outweigh your monthly expenditure on a property.
Furthermore, if you’re looking to obtain lending in the form of a buy-to-let mortgage they might have a minimum yield figure that a property needs to achieve for them to lend on it.
The rental yield is important. To be able to calculate the yield you need to know the rental value so, how do you gauge the rental rates for your investment properties?
Determine market value
Whilst a property brochure might provide you with an expected rental yield, how can you be sure that it is a realistic figure? Determining the market value of a property in terms of the realistic rent a property will command is a useful exercise when purchasing a rental property.
The property itself will dictate the value to a certain extent, of course, the location will have a big impact along with market conditions generally. When considering the rental value of a property there are several key factors that contribute:
- Size of the property, ie the number bedrooms and bathrooms
- Quality of the finish, is it modern and to a high standard?
- Special features such as an on-site gym or swimming pool
- Parking, garage or additional storage space
- Is the property furnished? If yes, to what standard?
- Local amenities – where are the nearest shops?
This list isn’t exhaustive but it gives you an idea of what tenants will be focusing on when they view the property and weigh up its suitability as their home versus others which are available.
These points are also useful when you’re trying to gauge a property’s rental value when comparing it to other similar properties.
Look at comparable properties
Collecting comparable evidence is what home surveyors do when conducting a mortgage valuation for a bank. It is a tried and tested method and one that usually provides a current and true rental value.
When comparing a property to others it is important to not only take into account the broad location but the immediate vicinity of a property, tenants might discount a property’s value if it overlooks an industrial site that operates from the very early hours of the morning or one that backs onto a train track.
There is also little point in comparing your modern two-bedroom apartment to a period three-bedroom house on the same road, they might seemingly be advertised as having the same rental value but that is largely down to supply and demand.
The most obvious place to begin researching the value of a rental property is on the internet. When collecting comparable evidence you can compare other similar properties easily and quickly via property portals and similar sites.
There is room for error relying only on this method as it is likely that you will only be able to see the asking rental price which may have been negotiated upon and therefore is inaccurate. Only the agent who let the property, the tenants and the landlord will know the exact amount of rent they have agreed to pay for the contract duration.
Talk to an expert
If you’re unsure or are short of time, an investment expert will be able to provide a rental analysis on a property to provide you with an idea of the realistic yield you can expect a property to achieve. Of course, no one has a crystal ball but in drawing from experience and local market knowledge a property consultant is as near as a buyer can get to being able to predict the future.
Buy rental property in the UK
If you’re considering purchasing a buy-to-let property in the UK our team of property experts can help you secure the perfect asset. To talk to us about your property plans contact us today on +44 (0) 2039507939 or send us an email at firstname.lastname@example.org