How to find the best rental yields in 2021
Rental yield is the term used to describe the returns that a buy-to-let investor can expect to achieve via rental income each year, expressed as a percentage of the property value.
Having an informed understanding of how rental yield works is vital when it comes to purchasing a buy-to-let investment. Rental yield is one of two main sources of income from a buy-to-let investment - the other being capital growth, which is the profit made when the value of a property increases.
When considering an investment, a sensible first step is to using our Local Data or Valuation tools to estimate the likely rental return on the property, and then use our rental yield calculator to understand what that represents as a gross yield.
Calculating gross rental yield
Calculating UK rental yield as a percentage is relatively simple. To find out your existing or potential rental yield, all you need to do is divide the annual rental income of your property by the amount of money you have invested in it. This figure should then be multiplied by 100.
For example, if you purchased a property for £200,000, and the annual rental income for the property was £12,000, this would equate to a gross rental yield of 6%.
If you would like to quickly calculate your rental yield, why not use our free PropertyData rental yield calculator tool?
Net vs gross: calculate net rental yield
Gross rental yield is your return before any expenses, whereas net rental yield takes expenses into account. Your costs will vary considerably depending on your individual investment.
Unless you’re an outright cash buyer, your mortgage interest rate will be your biggest expenditure, and you should aim to cover this with rental income with margin to spare.
You'll also need to factor in things like letting agent fees and home insurance.
Last but not least, maintenance and service costs, such as renovating a property or replacing/repairing the boiler or white goods should be factored into your finances from the offset.
When these expenses are taken into account, it’s easy to see why achieving a good gross rental yield is so important. The gross rental yield needs to cover all these costs, and leave enough profit at the end of the month for you as the landlord.
What is considered a good rental yield in the UK?
The average rental yield in the UK sits at around 3.5%, so anything above this can be considered good.
Rental yields vary considerably from location to location, so choosing an area with higher-than-average yields can be an important part of boosting your returns as a buy-to-let property investor.
There are lots of different factors that can impact rental yields, including location, demand for housing, distance from local amenities, crime rates and more.
Finding relatively affordable properties in areas where demand is high or increasing is often a good way to get a good rental yield.
Where is the best rental yield in the UK?
The average rental yields for long-let tenancies by region are:
- North West: 4.7%
- Yorkshire: 4.6%
- Scotland: 4.5%
- Wales: 4.3%
- West Mids: 3.9%
- East Mids: 3.8%
- South West: 3.7%
- North East: 3.5%
- South East: 3.3%
- East: 3.4%
- London: 2.8%
Of course these are large regions, and it's better to get more specific. Have a look at our Yield Hotspots data, updated daily to show the postcode districts in the UK where rental yields are highest.
And while location is the most important factor for UK rental yields, it is not the only one. It is still possible to achieve high rental yields in areas of regional underperformance like London, whereas some landlords might struggle to achieve a good return in high-demand areas of Liverpool. This is why market research is such an important factor.
What happens to rental yields in the UK during a recession?
Rental prices, which are instead largely dictated by the demand for housing, are generally more resilient than property prices.
Therefore rental yields can actually rise during a recession. For example, during the last financial crisis back in 2008, rents dropped by just 2% in comparison to property prices, which fell by almost 20%, boosting rental yields.
While the current pandemic and uncertainty surrounding Brexit might pose challenges, history has taught us that rental prices tend to weather the storm.
Rental yield UK: make the right investment
At PropertyData, we’re here to ensure investors make informed property decisions. When it comes to rental yields, our tools allow you to make better decisions by providing Local Data and highlighting rental yield hotspots.
To find out for yourself, why not try PropertyData for free - or alternatively, check out our tutorials for further information on how to maximise your investment potential today.
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