How to work out rental yield to make your buy-to-let profitable
The profit potential of buy-to-let properties makes them an attractive long-term investment option. However, the costs of being a landlord often eat into these profits – especially if you’ve miscalculated your rental yield.
So, what is rental yield, how do you work it out, and what else will you need to pay for as a landlord? Here’s the quick guide to making sure your first buy-to-let is a solid investment.
What is rental yield?
Mortgage providers and landlords talk about ‘rental yield’ a lot, but what does it actually mean?
Rental yield is the percentage return you’ll get on your investment into the property. A low yield means you won’t make a great return (and your money is better spent elsewhere), while a higher yield above 6% suggests a good investment.
Your rental yield isn’t your total profit, however. Remember that your mortgage repayments and other costs need to come out of this income too. So, when you’re working out rental yield, remember that it’s not pure profit; there’ll be a chunk taken out each month for other costs too.
How to work out rental yield
It’s vital that you work out the rental yield of a property before you put an offer in to buy it.
Do some research first. Find out if the property has previously been let and the monthly rental income. Take a look at similar properties in the area to get an idea of average rents. You don’t want to over-price your property as this may mean you won’t find tenants to fill it. However, you also need to be wary of under-pricing for the area as you’ll miss any potential profit.
Here’s how to work out rental yield:
- Take the expected monthly rental income and multiply by 12. This is your annual rental income.
- Divide the annual rental income figure by the price of the property.
- Multiply this figure by 100. The result is your rental yield percentage.
For example, let’s say you want to buy a house at £200,000. The monthly rental income will be £1,000 which is £12,000 a year.
12,000 ÷ 200,000 = 0.06
Multiply by 100 = 6% rental yield.
Depending on other costs, a yield of 5% or above will be profitable. Remember too that your rental income will pay off the mortgage. You can also benefit from growth in property prices when you sell at a later date, although this is never guaranteed.
Why rental yield affects your buy-to-let mortgage options
Buy-to-let mortgage requirements are stricter than mortgages for your own residence. First, you already need to own property before you can get a buy-to-let mortgage.
Second, you need to prove how you’ll pay the mortgage off. A good rental yield means you’ll cover your mortgage payments and other costs associated with being a landlord.
Other costs for buy-to-let properties
Buying a house comes with lots of hidden costs and fees. When you’re considering your first venture into buy-to-lets, it’s worth totting up the expenses to make sure your new rental property will be a profitable investment.
House deposit
Buy-to-let mortgages require a large deposit – sometimes 15%, but more commonly up to 25% of the sale price.
So, if you’re buying a property at £200,000, you’ll need a deposit of at least £50,000 to qualify for the mortgage. Ideally, you need more than this saved up as other costs quickly add up so you need to make sure you’ve got enough to pay those expenses too.
Mortgage arrangement fees and repayments
Mortgages cost more than just the monthly repayment. You’ll need to make sure you can afford the arrangement fees as well as the interest and monthly repayment.
Most of the time, this is covered by your rental income. However, when you first buy the property you may have an empty house for a few months while you renovate and source tenants. Make sure you can afford to make mortgage payments any time the property is vacant.
Remember too, that a vacant property costs in other ways, such as council tax and utilities standing charges.
Buildings and landlord insurance
Your mortgage provider will require you to have buildings insurance before they agree to lend to you. It’s also a good idea to have landlord insurance. This covers you for things like court fees when chasing unpaid rent or damage to your property.
Your mortgage adviser can help you find and choose the right insurance policies for your new buy-to-let investment. Contact your local adviser in Harrogate on 01423 895072 to find out more.
Maintenance and service fees
If you’re buying a flat or a house with a leasehold agreement, make sure you can afford the fees. The annual service charge can be rolled into your rent but you’ll need to make sure it is paid even when the property is vacant.
Consider maintenance costs too. Each year, you’re legally required to have your boiler serviced by a Gas Safe engineer. Every ten years you’ll also need to have an Energy Performance Certificate survey completed, and the EPC information must be provided to tenants.
You may also need to renovate parts of your property or keep aside a budget for redecoration when your tenants move out.
Agency fees
Tenants don’t pay agency fees any more; it’s on the landlord to pay for services such as referencing and credit checks. If you want the agent to manage the property, that’s an extra cost.
Agency fees vary between 5% – 20% of the rental income, depending on how involved they are in your property management.
Ask your local mortgage adviser about buy-to-let mortgages
If you’re confident that a buy-to-let investment is right for you, it’s time to speak to your local mortgage adviser. They’ll guide you through the application process for a buy-to-let mortgage, and make sure you’ve got the widest range of deals to choose from.
Contact our local mortgage advisers in Harrogate to book your appointment today.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your property may be repossessed if you do not keep repayment on your mortgage.
Find our more about our Mortgage Advice service in Harrogate
Common questions about buy to let investments
When looking for a buy-to-let property, it is important to consider factors such as location, potential rental income, and property condition. Location is particularly important, as properties in desirable areas are more likely to attract high-quality tenants and achieve a good rental income. Property condition is also important, as properties in need of extensive repairs or renovations may end up costing more in the long run.
One way to maximise rental income is to ensure that the property is well-maintained and in good condition. This can include making necessary repairs, updating appliances and fixtures, and investing in energy-efficient upgrades. It is also important to price the rental property competitively based on local market trends.
To manage tenants effectively, it is important to communicate clearly and establish clear expectations from the beginning of the tenancy. This includes outlining the terms of the lease agreement and addressing any concerns or questions that tenants may have. Responding promptly to tenant requests and addressing any maintenance issues can also help build trust and positive relationships with tenants.
To minimise vacancy rates, it is important to market the property effectively and attract high-quality tenants. This can include advertising the property online and in local newspapers, as well as offering incentives such as reduced rent or move-in specials. It is also important to respond promptly to tenant requests and address any maintenance issues in a timely manner to keep tenants satisfied and encourage them to renew their lease.
Hiring a property manager can be beneficial for those who do not have the time or expertise to manage their investment property effectively. Property managers can handle tasks such as advertising and screening tenants, collecting rent, and addressing maintenance issues. However, it is important to weigh the costs of hiring a property manager against the potential benefits.
Common mistakes to avoid include overpaying for the property, failing to conduct thorough due diligence, and neglecting to maintain the property properly. It is also important to avoid making decisions based on emotions or personal preferences rather than sound financial analysis. Additionally, it is important to have a solid understanding of the local market and to stay up-to-date on changes in regulations and laws affecting rental properties.
