Understanding Rental Yields

News at Kings Estates | 05/09/2017

Understanding Rental Yields

A rental yield can be calculated on either a gross or a net basis. The difference between the two is whether the yield is inclusive of exclusive of costs.

When you purchase a Buy to Let there are two ways in which you can make a return on your investment: capital growth and rental income. Usually you would look for a combination.

Capital growth refers to the change in a properties value over a period of time. Capital growth is hard to forecast and you should remember that house prices can fall as well as rise.

Rental income is the rent that you receive from your tenants. Like house prices rents can go up and down.

Calculating a rental yield of a property is a useful way to help make a decision on whether to purchase a buy to let investment. Providing you have done your calculations the rent you receive should provide you with a regular net income. This is why so many people are investing their money into properties as supplement pensions.

Gross and Net Rental Yields

Gross rental yield calculation:

If you purchase a property for £200,000 and receive a rental income of £1000 per month you would work out the gross rental yield by dividing the annual rent by the investment price.

£1000 x 12months = £12,000

£12,000 / £200,000 x 100 = 6%

Net rental yield:

The net rental yield is calculated by adding in the costs.

If the property has a mortgage of £150,000 at an interest rate of 4% the monthly mortgage payment would be £500. We will allow £100 per month for agency fees and insurance.

The net rent would be £400 after the £500 mortgage payment and £100 agency fees had been deducted.

The annual net rent would be £400 x 12 months = £4800

The deposit money invested is £50,000

The net yield is £4,800 / £50,000 x 100 = 9.6%

These examples demonstrate why it is important to consider the impact of interest rates when deciding how to fund your purchase.

In this example taking out a buy to let mortgage resulted in a higher net rental yield than going down a non- mortgage route. However, if interest rates had increased to 5% the rental yield would be the same in both cases.

The housing market can continue during lockdown in England

Prime Minister, Boris Johnson, on 4 January, announced England will move to a new national lockdown that requires, under UK Coronavirus Alert Level 5, people must stay at home, except for limited exceptions.

House moves are a limited exception and, therefore, are still be permitted to go ahead. Guidance issued by the UK Government states people can still move home, however, people outside a household or support bubble should not help with moving, unless absolutely necessary.

Estate and letting agents and removal firms can continue to work with property viewings still also allowed if anyone is looking to move.

It has been stressed the importance of following the national guidance on moving home safely, which includes advice on social distancing, letting fresh air in, and wearing a face covering.

Housing market activity returned on 12 May 2020 in England and has continued ever since due to the Government's belief in the importance of the sector and confidence that agents are operating safely.

For more information, please contact us.
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