12th April 2023
When looking to invest your money in a property or add to your existing portfolio, one of the key factors you will need to consider is your investment return and whether it will be worth the money that you spend. Calculating your rental yield can act as a benchmark to compare the performance of a property against other properties in different areas, or even compare the performance to different types of investments. To break it down, rental yield is the return made on a property investment in terms of monthly rent charged compared to the value of the property/price paid.
If you are thinking about investing in a buy-to-let property, you will need to calculate your rental yield, taking into account other factors such as running costs or agency management fees in order to get a clear picture of whether this decision is right for you. A rental yield is essential not only for landlords to establish worthy investments, but also for lenders to assess whether they are likely to give you a buy-to-let mortgage if you’re not making a cash purchase.
What is a good rental yield?
There is no hard and fast rule as to what a good rental yield is, as your return will depend on the location of your property as well as your expenditures. As a very general rule to give you a rough idea of what to expect, a rental yield of 7% is considered a very good yield for a buy-to-let property.
It is not advisable to purchase a property based solely on an expected high rental yield though, and several other factors should be considered. For example, a high-yield property might have little opportunity for making a profit if you decide to sell it later on, or it may have a history of unfavourable tenants.
When deciding if a property is worth your investment, you must factor extra costs into your budget. A good yield should be able to cover the running costs of the property as well as your mortgage repayments if you are not a cash buyer. Additionally, the return will need to make you some profit in order to build up an emergency fund should something happen at the property such as a broken boiler, as well as covering any periods when the building may be unoccupied.
What is the average rental yield in the UK?
As of 2023, the current average rental yield in the UK is 4.75%, with many of the higher-yield properties being located in northern areas. Whilst this is useful to know to give you a general idea of the overall property market, this isn’t necessarily a good frame of reference for your own property. It is important to consider the average for the area that you’re purchasing in, for example, if one area of the city or region presents an 8% yield, and another area presents a 4% yield, then it is more likely that the former is a better investment opportunity. Therefore, the rental yield calculation is particularly useful for comparing how different properties may perform.
Rank | City | Avg. Property Value (RightMove) | Avg. Rent PCM (Home.co.uk) | Avg. Annual Rent | Yield % |
1 | Edinburgh | £331,722 | £2,735 | £32,820 | 9.89% |
2 | Birmingham | £259,821 | £1,476 | £13,740 | 6.81% |
3 | London | £844,761 | £4,632 | £55,584 | 6.57% |
4 | Newcastle upon Tyne | £206,264 | £1,105 | £13,260 | 6.42% |
5 | Aberdeen | £187,370 | £975 | £11,700 | 6.24% |
6 | Stoke-on-Trent | £170,282 | £885 | £10,620 | 6.23% |
7 | Manchester | £285,493 | £1,479 | £17,748 | 6.21% |
8 | Leeds | £263,332 | £1,344 | £16,128 | 6.12% |
9 | Lancaster | £208,603 | £1,044 | £12,528 | 6.00% |
10 | Cardiff | £292,791 | £1,398 | £16,776 | 5.93% |
11 | Wolverhampton | £217,360 | £1,075 | £12,900 | 5.93% |
12 | Nottingham | £246,327 | £1,215 | £14,580 | 5.91% |
13 | York | £324,071 | £1,549 | £18,588 | 5.71% |
14 | Sheffield | £229,425 | £1,065 | £12,780 | 5.57% |
15 | Southampton | £300,001 | £1,369 | £16,428 | 5.47% |
16 | Portsmouth | £289,601 | £1,295 | £15,540 | 5.36% |
17 | Bristol | £394,484 | £1,723 | £17,712 | 5.24% |
18 | Sunderland | £160,830 | £697 | £8,364 | 5.20% |
19 | Hull | £165,345 | £706 | £8,472 | 5.12% |
20 | Derby | £232,570 | £977 | £11,724 | 5.04% |
21 | Bradford | £190,191 | £776 | £9,312 | 4.89% |
22 | Plymouth | £240,001 | £929 | £11,148 | 4.64% |
23 | Wakefield | £212,704 | £816 | £9,792 | 4.60% |
24 | Leicester | £272,700 | £1,034 | £12,408 | 4.55% |
25 | Chester | £294,304 | £1,101 | £13,212 | 4.48% |
26 | Brighton | £506,381 | £1,879 | £22,548 | 4.45% |
27 | Liverpool | £216,882 | £776 | £9,312 | 4.29% |
28 | Gloucester | £269,424 | £1,056 | £12,672 | 4.07% |
Northern areas including Manchester, Newcastle, Leeds, Glasgow, Middlesbrough, and Dundee dominate the top spots for rental properties in the UK with a high yield, as such they present a great opportunity to expand your property investment portfolio. On the other hand, whilst London as a region doesn’t offer high yield rates, sitting well below the average at 2.5%, the scale and demand for housing in the city can still make it a worthwhile investment provided that you have the funds to purchase in the capital.
It is worth noting that it isn’t as simple as considering high and low rental yields. As with any investment, there are risks. Sometimes, higher yields will have higher risks as they can be more subject to market conditions, tenant quality, or property management. Though at the same time, high rental yields may be reflective of an increase in demand. Therefore, it is important that the area you purchase a property in is thoroughly researched and accounted for in your calculations.
How to calculate rental yield
If you’d like to work out your rental yield, there’s a simple formula that you can use to get a percentage. To calculate a rental yield, you first need to know the annual rental income. You will also need to know the price paid for the property. To get a figure, divide the annual rental income by the price paid and multiply this number by 100 to get a percentage. For example, on a property that cost £230,000 with a monthly asking rent of £800:
£800 x 12 = £9,600
£9,600 / £230,000 = 0.041
0.041 x 100 = 4.1%
The rental yield is 4.1%
This calculation gives you your gross rental yield, but does not take into account any extra expenses such as running costs. If you’re considering buying a property to rent out, you will need to add extra calculations to your research to understand if the property is a worthwhile addition to your investment portfolio. To illustrate the extra costs, we can take a look at some national averages that might need to be considered in your calculations, assuming that tenants pay their own bills, and landlord insurance is not necessary for your rental:
- Stamp duty = Usually 5% of property value
- Monthly letting agency fees = usually 10% of your rental income
- Average monthly mortgage payment = £658
- Maintenance fund = recommended to have 1% of the property value in funds
When applied to the above example:
- Stamp duty = £11,500
- Monthly letting agency fees = £80
- Average monthly mortgage = £658
- Maintenance fund = £2,300
Total = £14,538
Of course, there are viable factors, for example, the stamp duty will only need to be paid once, and the maintenance fund may not be used regularly but these are important factors to consider when thinking about your yield. Even with only the average mortgage and letting agency fees, which total £738 a month, is a large sum that your yield will need to cover
What you’d like to get out of your rental is also a driving factor in what is considered a good rental yield. Generally speaking, most buy-to-let investors are happy if their yield covers all running costs, mortgage payments, and fees with a small amount of income left over to build an emergency fund for maintenance. This is because many investors rely on capital growth when it comes to selling their property later on. This is an extremely long-term strategy that requires careful budgeting. However, if you’re looking to make extra income in the shorter term, then your property will need a higher yield to ensure that the aforementioned costs are covered, as well as bringing in a good amount of extra disposable income.
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