When investing in buy-to-let property, it’s crucial to assess the potential profitability of the investment through rental yield. Rental yield is one of the key metrics that can help property investors gauge their expected return on investment. Rental yield provides valuable insight into how much income a property can generate relative to its value. In this article, we will explain what rental yields are, how to calculate them, and how investors can use this metric to make informed property investment decisions.
What Is Rental Yield and Why Does It Matter?
Rental yield is a percentage that measures the amount of money that an investor can expect to earn from their buy-to-let property.
For buy-to-let investors, rental yield is a crucial metric in determining whether a property is a sound investment. It reflects the relationship between rental income and the property’s market value, providing insight into the return on investment.
Understanding rental yield can help investors assess a property’s viability, influencing their decision to invest and helping determine appropriate rental rates for tenants. Since many factors impact rental yield, it’s important to carefully evaluate each element to gauge whether the property is a worthwhile investment.
There are two types of rental yield: Gross rental yield and net rental yield.
Gross Rental Yield
Gross rental yield is the percentage of a property’s total annual rental income relative to its purchase price, calculated before any expenses are deducted. This figure does not account for the costs associated with owning and managing a rental property, such as maintenance, taxes, and management fees.
Net Rental Yield
Net rental yield is a percentage that reflects the return on a rental property after accounting for all expenses, such as maintenance, management fees, insurance, and taxes. Unlike gross rental yield, which only considers rental income versus purchase price, net rental yield offers a more accurate representation of a property’s profitability. This makes it a more reliable metric for buy-to-let investors, helping them assess whether a property is a sound investment and if it aligns with their financial goals.
What Factors Influence Rental Yield?
Several factors influence the rental yield of a property. By understanding these key elements, buy-to-let investors can navigate the market with greater confidence.
Location
Properties in highly-sought after locations command higher rents due to increased demand. Factors such as the quality of local amenities, access to public transport, job opportunities, and overall safety significantly contribute to tenant interest in an area. As a result, buy-to-let investors can often achieve higher rental yields in these sought-after locations.
Property Price
More expensive properties that generate the same rental income typically offer a lower return on investment. In other words, higher property prices tend to result in lower rental yields, while more affordable properties provide higher yields. It’s important to distinguish between rental income and rental yield—while rental income generally increases slowly over time, typically in line with inflation, rental yield is a more immediate measure of a property’s profitability.
Demand
Demand has a significant impact on rental yield, as it directly affects an investor’s ability to adjust rental rates. When demand is high and supply is low, buy-to-let investors can increase rental rates, thereby boosting their rental yields. Conversely, when demand is low and supply exceeds demand, investors may need to reduce rental rates to attract tenants, which can lead to lower rental yields.
Interest Rates
Interest rates can significantly impact mortgage costs for investors, reducing overall net rental yields. Higher interest rates increase borrowing costs, which can stunt property price growth. In contrast, lower interest rates tend to stimulate property market growth by making mortgages more affordable, encouraging both first-time buyers and investors to enter the market, potentially driving up property values and rental yields.
Investors can maximise their rental yields by carefully considering all these factors. By choosing high-quality properties in popular locations, buy-to-let investors can enhance the profitability of their investment, ensuring higher demand and rental income potential, increasing their overall return on investment.
How is Rental Yield Useful?
Rental yield is a key indicator of how profitable a property investment can be. By evaluating rental yields, investors can compare properties and identify those with the highest potential for returns. This analysis can lead them to areas with strong rental demand and limited supply, creating opportunities for rental increases and greater profitability.
Understanding rental yield is essential for maximising return on investment, especially for buy-to-let investors. Calculating net rental yield provides a clearer picture of the overall cost, helping investors assess the property’s profitability. This calculation also accounts for factors like maintenance and mortgage costs, allowing investors to identify more cost-effective options.
By carefully considering these factors, investors can adjust their buy-to-let investment strategy accordingly.
In the UK, the average rental yield typically ranges between 5% and 8%, with yields above 6% considered great. These higher yields are often found in more affordable regions, such as the North West and East Midlands.
How To Calculate Rental Yield?
To calculate rental yield, times your monthly rental income by 12 to find your annual income. Divide that figure by the property purchase price or current value. Then multiply that figure by 100. This provides the total gross rental yield.
To calculate the net rental yield, times your monthly rental income by 12. Subtract your annual costs, like mortgage payments and maintenance. Divide that by the property’s value, then times that figure by 100 to get your percentage.
To simplify this process, access our rental yield calculator, which will provide you accurate calculations of your gross rental yield and net rental yield.
Best Locations In The UK For Rental Yields
Liverpool
Liverpool has consistently ranked as one of the best cities in the UK for property investment, offering average rental yields between 5% and 7%, with some areas boasting over 8%.
Liverpool’s appeal as a top buy-to-let city stems from its growing job market, excellent amenities, and high quality of life for tenants. With property prices consistently below the UK average—£188,000 in Liverpool compared to the £300,000 national average—the city presents an attractive opportunity for investors.
The L1, L2, and L3 postcodes, in particular, are in high demand due to their prime city centre locations. The average price for a flat in this area is £155,250, and with strong demand, these properties have the potential to generate substantial rental yields. As Liverpool continues its regeneration, particularly in the waterfront and Knowledge Quarter areas, demand is expected to rise even further, driven by new job opportunities and the city’s increasing appeal as a hub for tourism and events.
Liverpool also boasts a large student population of over 70,000, creating strong demand for student accommodation. Purpose-built student accommodation (PBSA) projects in the city offer attractive returns on investment. For example, Camden House, located in the city centre, offers a guaranteed 7.5% rental yield.
Buy-to-let investment in Liverpool presents significant benefits to investors looking to capitalise on high rental yields and the city’s continued rejuvenation.
Interested in exploring the opportunities in Liverpool City Centre? Click here to read our article on the benefits of investing in smaller properties in Liverpool
Manchester
Manchester is widely regarded as one of the top investment areas in the UK. Like Liverpool, the city’s property market has seen consistent growth, and with the North West region forecast to grow by 28% over the next five years, Manchester’s expansion is expected to continue.
The average rental yield in Manchester is 6.5%, with some areas offering yields as high as 12%. The city’s wealth of job opportunities, affordability, and overall appeal make it an increasingly attractive location for tenants. In addition to its strong appeal to working professionals, Manchester also boasts a student population of 100,000, with its world-class universities making it one of the best places in the UK and globally for students.
Key areas such as MediaCity, home to major employers like the BBC and ITV, are major drivers of demand for both jobs and property. Properties in these high-demand areas, like Advantage Investment’s MediaCity property, can yield up to 7% due to the area’s desirability.
Buy-to-let investment in Manchester offers significant opportunities, making it a prime choice for investors seeking high returns and long-term growth.
Explore the key property investment areas in Manchester here
Rental Yields Can Help Buy-To-Let Investors
By understanding rental yields, buy-to-let investors are better positioned to navigate the UK’s property market and identify the most promising investment opportunities. Contact us today for a free consultation, and Advantage Investment will assist you in sourcing the best properties, tailored to your unique investment goals.
