A recent survey suggested that only 26% of buy to let investors could correctly define the term ‘gross yield’ whilst just 38% of those asked could correctly calculate their return on investment and gross profit.

Rental yields are used to compare properties and also signify the rate of return from your investment. These will often give a good indication on whether an investment is worthy or not as it would state if it is making a profit or loss.

Here are some tips on how to calculate and work out gross and net rental yields to help you with your property investment.

1. Calculate your TOTAL property costs

Calculate your total property cost by adding up the property purchase price, stamp duty, renovation costs, closing fees, and any other property fees you may have.

  • Property Purchase Price: £150,000
  • Stamp Duty: £1,500
  • Renovation Costs: £3,000
  • Closing/Other Fees: £7,000
  • Total Property Purchase Price: £161,500

2. Calculate your GROSS rental yield

To calculate and work out the gross rental yield, you will take the amount of annual rent collected and divide it by the total cost of the property. The result should then by multiplied by 100% for gross rental yield.

  • Annual Rent: £15,000
  • Total Property Purchase Price: £161,500
  • Sum: £15,000 / £161,500 = 0.0928 x 100% =
  • Gross Rental Yield: 9.28%

3. Calculate your NET rental yield

The net rental yield will help you to determine whether or not your property is a good investment. If calculations show you are paying too much into your property, you can re-evaluate your investment decision.

Calculate your annual expenses by adding up a year’s worth of property repair costs, tenant vacancy, property taxes, landlord insurance, agent fees and hiring costs.

To calculate and work out the net rental yield, subtract annual expenses from annual rent and divide this result by the total cost of the property. The result should then by multiplied by 100% for net rental yield.

  • Annual Rent (IN): £15,000
  • Annual Costs (OUT): £700
  • Total Profit/Loss: £14,300
  • Total Property Purchase Price £161,500
  • Sum: £14,300 / £161,500 = 0.089 x 100% =
  • NET Rental Yield: 8.88%

Knowing the net rental yield helps you plan ahead because it will provide insight on how much money to set aside for property upkeep and other expenses.

Tips

Work out the rental yield on your property regularly. The best way to stay on top of your investment is to calculate rental yield figures on a yearly basis and compare your figures to other properties.

Keep in mind that your overall return is also influenced by any tax relief you may be eligible for and also any increase in your property’s value, which you will gain from if you sell in the future.

When performing rental property investment analysis, use the net rental yield formula instead. The net rental yield is more accurate because it takes into account the operating expenses of the property.

Properties normally have a gross rental yield of anything up to 10% depending on the investment. Anything over 5% is good, above 10% is an excellent return.

The best investment choice will always be a property with a higher rental yield because it will give you a higher return on your investment.

Working out your rental yield on a regular basis will help determine the best time to sell your property. The majority of sales occur at least 5-10 years after the property purchase date. Within this time you should usually have made capital gains from your property.

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Daniel Peacock

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