What is a good yield on rental property?

For property investors, understanding what is a good yield on rental property is critical. Rental yield essentially measures the return on investment (ROI) for a property, giving you a way to assess whether a property is financially worthwhile.

But what does a good yield look like? In this article, we’ll explore what a rental yield is, how to calculate it, and other factors that can influence your rental returns. Let’s get started!

What is rental yield?

Rental yield is a measure of how much income a property generates compared to its cost. It’s calculated as a percentage, helping investors understand the return they’re earning from rent relative to the purchase price. In simpler terms, it’s the amount of cash a property brings in compared to its overall cost, making it a go-to metric for property investors.

Yield is a fantastic way to look at the bigger picture of your investment. If you’re only focused on monthly rental income without considering the broader ROI, you could miss key aspects of the investment. Rental yield helps keep that balance, factoring in both income and the initial cost of the property.

Calculating yield on rental property

Calculating yield on a rental property is straightforward and gives you a concrete number to work with. Here’s the basic formula:

Gross Rental Yield

Gross Rental Yield = Annual Rental Income divided by Property Purchase Price x 100

Gross rental yield doesn’t include any expenses, such as maintenance or taxes. It simply gives you a general view of income versus cost.

Net Rental Yield

Net Rental Yield = Annual Rental Income minus Annual Expenses divided by Property Purchase Price

Net yield, on the other hand, accounts for expenses and can offer a more realistic view of returns. It helps paint a clearer picture of what you’ll actually take home. For a deeper breakdown of how to work out rental yield, check out our guide on how to work out rental yield.

What is considered a good yield?

So, what is a good yield on rental property? In the UK, a rental yield between 5% and 8% is generally considered good. Here’s a breakdown of what various yield ranges might indicate:

Low yield (Below 5%)

A yield below 5% could mean the property is expensive relative to its income. Properties in highly desirable locations, like city centres, often fall into this category. While the yield may be low, the potential for long-term property appreciation can sometimes offset the lower cash flow.

Moderate yield (5% – 8%)

Yields in the 5% to 8% range are considered good and balanced. Properties in this range are often located in suburbs or secondary cities where rental demand is steady. The rental income provides a fair return while the property value is also more likely to appreciate.

High yield (Above 8%)

A yield over 8% might be possible in areas where property prices are relatively low, but demand for rentals is high. This is often found in up-and-coming neighbourhoods or areas with a strong student population. High yields are good for cash flow, but they may come with higher risks, such as fluctuating demand or higher maintenance costs.

Factors affecting rental yield

Several factors can influence whether a property offers a good yield or not:

Location

Location is the most important factor. Properties in city centres or areas with strong job markets often see lower yields because the property values are higher, but demand tends to be steady. In contrast, properties in the outskirts or developing areas might have higher yields due to lower purchase prices and potential future demand growth.

Tenant type

Different types of tenants can impact your yield. For instance, student housing or short-term rentals often bring in higher yields but can come with more turnover and maintenance requirements. Family tenants, on the other hand, may offer more stability, even if the yield is slightly lower.

Property type

Apartments, single-family homes, and multi-family units all yield differently. Multi-family properties might offer higher yield due to multiple income streams from one property, whereas single-family homes can attract long-term tenants but may yield less due to higher property costs.

Market trends

Local market trends, such as new developments, infrastructure, and economic changes, can all influence rental yields. If an area is rapidly developing, it might mean higher future demand, increasing yields.

Expenses

Property expenses directly impact net yield. Repairs, taxes, management fees, and mortgage interest all reduce your take-home yield, so these should be considered carefully.

Why rental yield matters

For landlords and investors, rental yield is more than just a number. It’s a way to gauge whether your investment is working for you. A solid yield can mean positive cash flow and steady income, while a low yield could suggest that the property is more of a long-term appreciation play. Calculating yield on rental property can clarify if you’re getting the best of your investment, or if a different property might provide a better return.

Tips for boosting rental yield

If you’re looking to increase your rental yield, there are a few strategies to consider:

Upgrade your property

Simple upgrades, such as modernising the kitchen, upgrading bathrooms, or adding energy-efficient appliances, can help you attract higher rents.

Re-evaluate your rental price regularly

Property markets fluctuate, and so should your rental prices. By evaluating your rental rate regularly and keeping it in line with the market, you can ensure your yield stays strong.

Consider short-term or furnished rentals

Short-term rentals can bring in higher yields, especially in tourist-heavy areas. Furnished properties can also attract a premium rent, though they may come with added fair wear and tear.

Improve tenant retention

Good tenants are worth keeping, as they reduce the time and money spent on turnover. By maintaining the property well, addressing tenant needs, and fostering a good relationship, you can improve your yield through consistent rental income.

Understanding what is a good yield on rental property is vital to making informed investment decisions. A yield of 5% – 8% is generally solid in the UK, but what’s ‘good’ can vary based on your personal investment goals, the property’s location, and other factors.

For longer-term investors, a lower yield might still be attractive if the area has significant growth potential. On the other hand, if immediate cash flow is your priority, focusing on properties with higher yields in less central areas might make more sense.

By carefully calculating and understanding rental yield, landlords can maximise their rental property investments, ensuring a balance between income and long-term appreciation.

When thinking about your expenses as a landlord, don’t forget about landlord insurance. Landlord insurance offers protection to landlords against the perils of renting. Find out more and contact us via email or to give us a call on 01788 818 670.