What is rental yield, and how to calculate rental yield?

By Georgia Galloway | Thursday 16th May | 7 minute read

Rental yield identifies the returns of a rental property. Rental yields differ throughout the UK. But what is a good rental yield, and how is it calculated?

61% of landlords witnessed an increase in their rental yields. This statistic asks what exactly rental yield is, how it is calculated, and what constitutes a 'good' rental yield.  

What is rental yield and how is it calculated?

This comprehensive guide delves into the methodologies for calculating gross and net rental yields, explores factors influencing yields such as property location, market conditions, and property specifics, and offers strategies for maximising returns. As rental yields continue to be a decisive factor for landlords in evaluating the performance and potential of their investments, understanding these elements becomes crucial for both seasoned and prospective property investors.

What is rental yield?

The rental yield represents the income earned from renting a property. This figure indicates the percentage return generated by the rental income and the property purchase price. It is a fundamental measure that determines the profitability of your investment.

How to calculate rental yield

Calculating your rental yield will let you know the financial return you're achieving on your rental property or properties.

There are two types of rental yield: 

  1. Gross rental yield everything before expenses
  2. Net rental yieldeverything after expenses

How do I calculate gross rental yield?

Gross rental yield measures the rental income a property generates in relation to its purchase price. It's a good indicator of what your return on investment could be before purchasing a property and knowing its specific ongoing costs.

It's useful as a snapshot and can be used to compare different investment opportunities when looking at multiple properties or locations.

Gross rental yield is calculated by dividing the annual rental income by the property's total purchase price and multiplying it by 100.

How to calculate Gross Rental Yield

For example, let's say you purchased a property in the UK for £280,000 and receive a monthly rental income of £1,200.

Step 1. Calculate the annual rental income: £1,200 (monthly rent) x 12 (months) = £14,400.

Step 2. Divide the annual rental income by the property's purchase price: £14,400 / £280,000 = 0.051.

Step 3. Finally, multiply the result by 100 to express it as a percentage: 0.051 x 100 = 5.1%.

So, in this example, the rental yield would be 5.1%.

How do I calculate net rental yield?

Net rental yield considers the property's operating costs, such as maintenance, property management fees, insurance, property taxes, and void periods. As it factors in your ongoing costs, it is a more comprehensive method of understanding your rental property performance and investment returns compared to gross rental yield.

How to calculate Net Rental Yield

For example, if you own a rental property, which you purchased for £280,000. The property generates an annual rental income of £14,400. However, you incur 3 operating expenses related to the property (example figures below).

  • Mortgage payments (interest only) = £850
  • General maintenance and repairs = £2,800
  • Landlord insurance = £250

To calculate the net rental yield, we'll follow these steps:

Calculate Total Operating Expenses:

Total Operating Expenses = £3,900

Calculate Net Rental Income:

Net Rental Income = Annual Rental Income − Total Operating Expenses

Net Rental Income = £14,400 − £3,600 = £10,800

Calculate Net Rental Yield:

Net Rental Yield = (Net Rental Income/Property Purchase Price)×100

Net Rental Yield = (£10,800/£250,000)×100

Net Rental Yield = 4.32%

So, the net rental yield for this property is 4.32%.

What is a good rental yield?

As of 2024, the average rental yield in the UK ranges from 5% to 8%. According to Natwest, a 5-6% return is considered average, while anything above 6% is considered good. 


Why is rental yield important to landlords?

The higher the rental yield, the higher the profit. Landlords will target areas with high rental yields to maximise their investments. Rental yield also allows landlords to see if they break even, especially while buy-to-let (BTL) mortgages and other property-related costs remain high.

What factors influence rental yield?

Understanding rental yields is crucial for landlords to evaluate buy-to-let property performance, and multiple factors influence rental yield:

  • Market demand: Local rental demand drives rental prices. Proximity to amenities like schools, transportation hubs, shopping centres, and employment centres can significantly impact rental demand and rates.
  • Property size and type: Larger properties generally yield higher rental incomes, but this can vary based on location and market demand. The type of property (e.g., single-family home, apartment, flat) also affects rental yield.
  • Property condition and maintenance costs: Well-maintained properties with modern amenities may command higher rents and thus generate better yields. Conversely, high maintenance costs can eat into rental income and reduce yield.
  • Interest rates and financing costs: Mortgage rates and financing terms impact the cost of financing a rental property. Lower interest rates can reduce borrowing costs for property investors, potentially boosting the NET rental yield.

Does location impact the rental yield? 

Yes, the property location impacts the gross rental yield. Location, location, location. Factors such as local market conditions mainly affect the open market value of a property. As the property value is a key consideration for calculating the rental yield, whatever affects the property value will also affect the rental yield. The following list shows how location plays a big factor in impacting rental yield.

Proximity to quality schools and universities

Proximity to quality schools and universities can attract families and students, potentially increasing rental demand and yield. On average, rental yields for houses near a university are 1.3% higher than a typical rental property.

Market conditions (supply and demand): The balance between supply and demand in the rental market directly impacts rental prices and, consequently, rental yield. High demand and limited supply typically lead to higher rental yields.

Regulatory environment: Local laws and regulations, such as selective licensing, can affect rental yields by influencing prices and operational costs. Councils determine the scope of selective licensing, which may cover an area or a specific location. 


Where are the highest rental yields in the UK?

As of May 2024, the 3 regions with the highest rental yields in the UK are the North East (7.65%), Scotland (7.48%) and the North West (6.66%).

Historically, regions with higher gross rental yields tend to have lower property prices. Cities like Liverpool, Manchester, and Birmingham have often been cited as offering relatively high rental yields due to their strong rental demand and more affordable property prices compared to London and the South East. 

Region

Average price of a buy-to-let property

Average monthly rent

Average gross rental yield

North East

£109,072

£695

7.65%

Scotland

£127,284

£793

7.48%

North West

£152,719

£848

6.66%

Wales

£164,388

£881

6.43%

Yorkshire and the Humber

£150,261

£799

6.38%

Northern Ireland

£144,423

£735

6.11%

West Midlands

£182,531

£905

5.95%

East Midlands

£176,730

£860

5.84%

South West

£240,472

£1,077

5.37%

South East

£297,971

£1,325

5.34%

East of England

£264,539

£1,163

5.28%

London

£516,295

£2,121

4.93%

Source: The highest yielding areas for buy-to-let property in the UK, Zoopla (2024)


How can you maximise the rental yield?

Maximising rental yields means minimising the cost of property ownership and maximising the income it generates. of your rental property investment. It's all about increasing your rental income while keeping your expenses in check to get the best return on your investment. Here are 4 ways you can maximise your investment:

1. Evaluate local rents 

It's essential to know the rental market in your area inside out. Research what similar properties are renting for, considering size, location, amenities, and condition. Websites, local rental listings, and speaking with estate agents can provide valuable insights. By understanding the going rates, you can price your property competitively to attract tenants while maximising your income.

Take London, for example. In April 2024, the average monthly rent in Bexley was £1,520, compared to £3,459 in Kensington and Chelsea.

2. Reduce void periods

Empty properties don't generate income, so reducing void periods is essential. Our survey found that 34% of landlords experienced an increase in void periods in 2023, possibly due to the rent rise that the tenant could no longer afford or that they deemed the property not worth the new price. 

Develop effective marketing strategies to attract potential tenants quickly. This might include professional photography, online listings, and utilising social media platforms. Discounts for longer leases or move-in specials can motivate tenants to sign on faster. Additionally, ensure your property is well-maintained and in good condition to make it more appealing to prospective renters.

Our guide to finding and keeping good tenants can provide more information on the best ways to reduce void periods. 

3. Reduce operational expenses

Managing expenses is key to maximising your rental yield. Look for opportunities to reduce operational costs without sacrificing the quality of your property or services. This could involve negotiating lower prices with service providers or implementing energy-efficient measures to lower bills. Our 2023 Renters report found that 60% of renters considered the EPC rating important when choosing a rental property. Increasing the EPC rating makes you more likely to retain and attract new tenants. 

4. Improve the quality of your property 

Investing in improvements and upgrades can increase the attractiveness and value of your rental property, allowing you to command higher rents. Focus on upgrades that offer the largest return on investment and appeal to your target market in your local area. This might include refurbishing the kitchen or bathroom, installing modern fixtures and appliances, upgrading flooring or lighting, or adding desirable amenities like laundry facilities, parking spaces, or outdoor living areas.


How can you finance property improvements?

Savings: The most straightforward way to finance property improvements is to use your savings or existing capital. This method eliminates the need to pay interest or fees associated with loans. However, it might deplete your liquidity and limit your ability to address unexpected expenses.

Property refurbishment finance: Property refurbishment finance is designed explicitly for property improvements. It's typically secured against the property and provides the necessary funds to upgrade without significantly impacting your finances. However, assessing the interest rates, terms, and fees associated with this financing option is essential.

Equity Loan or Line of Credit (HELOC): If your property has significant equity, you can leverage it to secure a loan or line of credit. Because HELOCs are secured by the property, they often offer lower interest rates than other forms of financing. 

Government Grants or Loans: Depending on your location and the nature of the improvements, you may qualify for government grants or loans aimed at property refurbishment and improvement. However, these programs often have specific eligibility criteria and application processes.


Final thoughts

The recent landlord report by Finbri indicates that 61% of landlords saw their rental yields increase in 2023, highlighting the importance of understanding and optimising rental yield in property investments. Rental yield, calculated by comparing annual rental income to the property's purchase price, is a critical indicator of investment profitability. 

There are two types of rental yield calculations: gross rental yield, which provides a basic profitability snapshot before expenses, and net rental yield, which offers a more detailed assessment by accounting for operating costs. 

A "good" rental yield in the UK typically ranges from 5% to 8%, with anything above 6% considered favourable. Local market demand, property type and condition, and interest rates significantly influence rental yields. Optimising rental yield can involve increasing rents, reducing vacancy periods, minimising operational costs, and investing in property improvements to enhance attractiveness and value.

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