Investors considering a property are usually most interested in one figure – the rental yield. And rightly so, without using the rental yield figures as a guide it’s difficult to compare investment opportunities and understand the return you should expect.
In the current climate, it can be difficult to ascertain figures, price growth has an impact on rental yields as does the supply and demand of rental property in a particular area. Here we consider the importance of rental yield and clarify: In today’s market what is a good rental yield for an investment property?
What is a rental yield?
A rental yield is simply the return on investment received via rental income. The percentage figure tells an investor or potential investor how much money they will make on that particular property.
For the most part, people invest in property to increase their income via rental returns so the yield on investment is a key factor for consideration.
Some developers of new properties will offer a rental assurance, not to be confused with a rental guarantee – read our full article on Rental Assurance vs Rental Guarantee to understand the difference between these terms or watch our video on the subject.
The best investment property strategy
Whilst rental yield is exceptionally important when considering a buy to let investment property there are other factors that will put you in a better position long term.
Depending on your motivations for buying an investment property you might become very focused on the rental income a property will generate but it’s important not to be blinded by the shiny lights and look to the future.
A property could be presented with a very impressive yield but have you also considered the capital growth potential of the property – is the area likely to see positive price growth and will it continue to attract tenants willing to pay and achieve the predicted rental income?
The best investment strategy when purchasing a rental property is often to find a property that presents a blended return – a good rental yield, an area which will continue to attract tenants and prospects for capital growth.
Calculating rental yield
For the most part, properties advertised as investment opportunities will be presented with the yield figure but in the instance, it’s not clear or you’d like to do the math yourself the equation is very simple:
You take the expected annual rental income divide it by the purchase price of the property and then times this figure by 100 to give you the rental yield percentage.
If you’re hoping to establish the rental rates on properties you already own or want to investigate an investment opportunity further you might find some of the tips in our article How to gauge the rental rates for your properties a useful read.
The difference between Gross Yield and Net Yield
When considering what a ‘good yield’ is on a property understanding your gross and net position is important. Gross yield is the figure before expenses, this is commonly the yield presented on advertised properties. Net yield is the position after the outgoings associated with that property.
The gross yield might lead an investor to believe an investment will be more profitable that is reality, this inflated figure can be misleading. Taking away the headache of calculating the outgoings vs income on each opportunity considered; the information we provide on properties shows the net yield, we believe this transparency allows investors to make well-informed decisions and compare options accurately.
What is a good rental yield?
In the UK a yield over 5% is generally considered to be ‘good’. Depending on the type of investment property there should be different expectations – for example we’d expect yields to be higher on student accommodation for two reasons; purchase prices for student accommodation tend to be lower and there is a constant high demand for student accommodation which maintains higher rents, generating a strong rental yield.
Some residential investment properties also come with excellent expected rental yields depending on where you look for a property.
Where to find the best rental yields in the UK
As prices have increased exponentially London rental yields have reduced, in the capital a rental yield of a property being purchased in today’s climate would be considered acceptable if the figure was around 3%.
For those seeking higher rental income along with prospects for capital growth there are several investment hotspots we can recommend.
The TD Christmas Calendar – What is a good rental yield for an investment property.
Birmingham
The UK’s second city, Birmingham has one of the country’s fastest growing economies and presents an excellent long term investment with impressive prospects for capital growth. By buying the right investment property in this well connected city an investor should hope to achieve a net yield of around 5%.
Liverpool
The north west offers investors some excellent opportunities for investment – Liverpool currently has some of the highest yielding rental properties in the country. The city has already benefitted from and is continuing to benefit from significant regeneration pointing to potential for capital growth too. A good net yield on an investment property in Liverpool would be around 7%
Manchester
Another city of note in the north west is Manchester, whilst this city has been on many investors radars for some time it continues to offer an excellent investment opportunity with yields of around 6% and good potential for capital growth in an already established yet progressive city.
Finding a property with a good rental yield
If you’re an investor seeking a property with a good rental yield our team of investment specialists can help you acquire a suitable asset. To discuss how we can help you with your next buy-to-let investment, talk with us directly, you can call us on +44 (0) 2039507939 or send us an email at [email protected].
