What is rental yield and how is it calculated?

If you’re an existing landlord, knowing the rental yield generated by your property, or portfolio, is key to understanding the return you’re getting on your investment.

For new investors, rental yield is equally as important when buying property – but can be difficult to understand.

In this piece, we’ll explain what rental yield is and how you calculate it, before looking at some average yields across the UK…

What is rental yield?

Rental yield is the annual return you achieve from renting out a property.

Your property’s yield tells you the percentage return your rental income is generating against the property’s original purchase price.

How to calculate rental yield

To calculate your property’s rental yield:

1. Take your property’s annual rental income

2. Take your property’s purchase price, or current market value

3. Divide the annual rental income by the price / value

4. Multiply the figure you get by 100 to give you the yield percentage

For example, let’s say you’ve purchased a new rental property for £180,000 and you’re charging your tenant £800 per month (£9,600 per year) in rent.

This is how you’d calculate your yield:

• Divide 9,600 by 180,000 = 0.053

• 0.053 x 100 = 5.3% rental yield

What does gross rental yield mean?

Gross rental yield is calculated based on your property’s value against what it generates in rental income – and doesn’t factor in any costs associated with renting out a property, which might include:

• Letting agent fees

• Maintenance

• Landlord insurance policies

To work out your net rental yield, deduct your costs from your annual rental income, then divide this figure by your property’s value and multiply by 100 to give you your net yield percentage.

What is a good rental yield?

Rental yields, like property prices and monthly rent figures, vary depending on where you are investing.

Generally, a gross rental yield of 5% or more has always been considered to be a ‘good’ figure, although higher yields can be found in certain areas of the UK.

Highest rental yields in the UK

While rental yields can vary from postcode to postcode in some towns and cities of the UK, it’s possible to get a view of yields in each major region through house price and rental data. Here, we’ve calculated average gross yields in the North West, North East, Wales, East Midlands, West Midlands and Yorkshire & Humber using the most recent data from Rightmove’s House Price Index and Rental Price Tracker – which shows rents are on the rise across large parts of the UK.

Yields in UK towns and cities

When looking to buy an investment property, it pays to examine yields more closely where you’re looking to invest.

Here, we’ve calculated average gross yields in some of the towns and cities Whitegates landlords invest in using the most recent price and rental data from DataLoft.

North West

Wales

East Midlands

West Midlands

Yorkshire & Humber

The current UK rental market

Tenant demand was 41% higher in February 2021 than at the same time in 2020 – with Rightmove putting the rise, in part, down to sellers moving into rental homes while they search for their next property to buy.

Further reading…

Another thing landlords have to pay close attention to is taxes – and if you decide to sell your rental property, capital gains tax. Our guide explains everything you need to know. There are also a host of landlord legislation changes coming into force in 2021 and we’ve outlined the most important right here.

Finally, if you’re thinking about investing in Houses in Multiple Occupation (HMOs), there are even more regulations you’ll need to know about – take a look at this guide, which explains everything.