Do you know how to calculate your rental yield?

how to calculate rental yeildsWorryingly over a quarter of landlords say they do not know what their rental yield is; furthermore one in 10 claim not to know how to calculate their yield at all*.

With the average net rental yield at 5.9 per cent any small changes to your profit margins could have dire consequences for your letting business. Being able to calculate how market variations – such as the Chancellor’s recent announcement on mortgage interest or impending interest rates rise –will impact your business is essential in being able to address issue before they become a financial burden.

How do you calculate a yield?

There are three main ways to calculate a rental yield:

  1. Gross yield
  2. Net yields
  3. Yield actual investment to date

Whichever method you choose is fine as long as any future comparisons are made like for like.

So for those who aren’t sure what to include or how to go about it the NLA has put together a simple guide to get you started.

Gross yields

What it’s for?

Gross yield is used to identify the yield of your investment before any outgoings such as tax and insurance.

How to calculate

Your gross yield is the income generated by the investment, before expenses are deducted, divided by the value of the investment.

Gross yield = (Annual gross rental income) / (value) x 100

What is considered as value?

Value can either be a property’s market value or the purchase price. You can use both but you will get a more realistic figure if you use market value when calculating your gross yield as it will take into account the value of the pound and any variation to the property value.

Net yields

What it’s for?

A property may have a high gross rental yield but the rental return may be low when expenses are accounted for. For this reason, net yield is a better measure than gross yield when assessing returns.

The net yield helps you get a picture of how your books are balanced and whether it will is a viable letting business.

How to calculate

To calculate your net yield you subtract all expenses, including stamp duty and taxes.

Net yield = (Annual rental income – Annual expenses) / (value) x 100

Yield on actual investment to date

What it’s for?

And finally, you’ll need to calculate your yield on actual investment to date. This gives you an idea of how the investment has performed since purchase.

How to calculate

This compares your income against ALL costs incurred by the investment, including the deposit and any capital repayments.

Yield actual investment to date = (Annual rental income –Annual expenses / actual expenditure (incl.  Stamp Duty and Deposit) x 100

Work out your yield using our online calculator

The NLA provides a handy online calculator to help you calculate your rental yields and find out how your investments are performing. You can give them a go here.

WARNING:

Once the Chancellor’s proposed changes to mortgage interest tax relief comes into force, in 2017, you will have to adjust your calculations. To get an idea of how the changes will affect you try our loan interest calculator.

The information provided is this blog is indicative of a basic approach to yield calculation, which may be useful to landlords interested in appraising their performance. The NLA Accepts no liability for user error or the accuracy of data used to calculate yields using the information provided.

*NLA Quarterly Landlord Research Panel – Q2 2015 (977 respondents)

2 thoughts on “Do you know how to calculate your rental yield?

  1. I want to know how to work out my annual yield and do not understand what the “/” means in your method of calculation.

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