RENTAL YIELDS ARE AN EFFECTIVE PROFITABILITY BAROMETER

New investors to the buoyant, residential buy-to-let sector enter for one of two reasons. Either they’re investing for small rental returns in an area with large capital growth or they’re investing in an area and property known to produce a high income. Either way, 'rental yields' are crucial to measuring their success and need to be fully understood and properly calculated.

They come in two forms – gross and net – and whilst neither are 100% accurate, they are the most useful barometer a landlord can have.

Phil Pinkney of leading UK lettings specialist Belvoir, which has an office on Winchester Street in Andover says: “Newcomers to the buy-to-let market must be prepared to look in detail at the expected 'yield' from a property and have realistic expectations for the return on their investment."

“Whilst we acknowledge that some property purchases will always be made by the heart, it is essential to be ruled by your head. Quick and easy rental yield calculations will provide just that and at Belvoir, our staff are always happy to advise landlords on how to formulate them,” he added.

Belvoir has a structured investment advice plan which it presents to all prospective landlords and offers the following public explanation of rental yields:

Gross Rental Yield:

What is it? In short it’s the expected annual rental income of a property expressed as a percentage of the total property value.

Why is it useful? Whilst not being wholly accurate in terms of what you receive, it is easy to formulate before purchase, provides a good yardstick for comparison and increases the likelihood of a successful venture.

How is it calculated? In four simple steps.

1. Establish the probable monthly rent – this can be done by looking at similar properties in the area. If you’re unsure, ask at your local Belvoir office or visit www.belvoirlettings.com

2. Establish probable yearly rent – Very easy, just multiply the monthly rent by 12

3. Divide the yearly rent figure by the sale price of the house

4. Multiply by 100 to get a percentage. This is your gross rental yield.

What do I do now? Once you’ve calculated the gross rental yield for a property look at how its yield compares with other properties in the area, the area average and the national average.

“We advise all landlords to conduct gross rental yield calculations on a number of properties before making a purchase. The first property you see may have been the one that tempted you into the sector but it may not always be the best investment. Buy-to-let can be very profitable but only if treated like any other business opportunity,” added Phil.

Net rental Yield:  

What is it? In short it is a post-purchase calculation of the total rent received minus the expenses the property incurs expressed as a percentage of the total property value.

Why is it useful? If the figures for expenses are correct this is a very easy way to monitor the profitability of your purchase.

How is it calculated? In seven simple steps

1. Establish the monthly rental amount – this should be listed in the tenancy agreement.

2. Multiply by 12 to establish a yearly income.

3. Subtract the percentage of the year that the property is unoccupied – if applicable

4. Add together the yearly outgoing costs - insurance premiums, replacement of fixtures and fittings, periodical property redecoration, maintenance, ground rent if the property is leasehold and the lettings agency fee (for a very competitive fee and service contact Belvoir).

5. Subtract the total outgoings from the yearly income to get your net income

6. Divide your net income by the total property value.

7. Multiply by 100 to get a percentage – this is your net rental yield.

What do I do now? Once you’ve calculated your net rental yield you need to compare it with the initial target you set. If it’s higher, you need to analyse why in order to be confident the trend will continue. If it’s lower, the root cause needs to be identified. If you cannot reconcile them, you should seek expert advice to help resolve the issue.

“A landlord is more likely to be successful if they adopt a professional approach. At Belvoir, we recommend all our landlords conduct regular rental yield calculations and store their results on an excel spreadsheet for year on year analysis. It is good practice and something we are happy to help with and advise on,” added Phil

“In this current economic climate, buy-to-let investors have the potential to achieve much higher returns than by putting their funds into a traditional bank account with very low interest rates.

“At Belvoir we always strive to achieve the best return for our landlords and we can offer friendly and expert advice on how to maximise yields,” he added.

If you’re a prospective landlord keen to know more about rental yield information or any other aspect of buy-to-let investment, then please call Belvoir on 01264 366611 or email andover@belvoirlettings.com. One of our team will be happy to assist you.