I was talking about rental yields in Watford to a local landlord friend mine the other day who is a self-confessed accidental landlord.  He inherited his investment property from his parents who died a few years ago.  They lived in a typical 3-bed terrace on Benskin Road (West Watford) and although the house was in great condition and could have been sold pretty quickly after he just couldn’t bring himself to sell it.  So he came to me and asked if I’d rent it out for a little while for him while he made up his mind what to do.  Of course I was happy to help.
2 Years later he’d collected the best part of £25,000 in rent and he’s decided there could be something in this ‘property investing lark’ (his words) and wanted to ask my advice on what he should buy next and whether I could give him any advice on how to look at investments.
I explained to him that one of the main thing that property investors look at to start with is rental yield – which he knew nothing about – so we discussed gross yield and net yield then I sent him off to find another house to buy!  Of course I assured him that he was welcome to run anything by me first if he needed some advice before buying.
I’m sure there are a few more accidental landlords who could benefit from knowing a bit more about how to work out yield on property investment whether it’s gross or net so let’s have a look at it here.
Rental yield is the total annual rent, shown as a percentage of the value the property is bought for. Here are a couple of examples of how you might work it out.
 
Property 1
Monthly rental income = £1200
X 12 = £14,400 (The annual rental income)
Investment = £275,000
£14,400 / £275,000 = 0.052 x 100 = 5.2%
So the yield is 5.2%
 
Property 2
Monthly rental income = £950
X 12 = £11,400 (The annual rental income)
Investment = £225,000
£11,400 / £225,000 = 0.0506 x 100 = 5.1%
 
Property 1 has a higher percentage and hence a higher yield so on paper may seem the better investment!
 
So we’ve just worked out the gross yield which is a great way to quickly assess the quality of you investment.  You may want to think about the net yield as this is the money you end up with in your pocket at the end of the month!  To find this we take into account the costs and expenses throughout the year that come hand in hand with your investment.
For example:

  • Maintenance
  • Voids (although we rarely have voids at lettingagentswatford.co.uk)
  • Agents fees
  • Mortgage interest (speak to your accountant as the recent budget has changed the rules on this)
  • Landlord insurance
  • Replacement of Fixtures and fittings
  • Leasehold fees / Service Charges

For either of the above examples this could add up to £8,000 in a year when you include mortgage payments – which will be the highest cost to take into account – so let’s take property 2 and work out the net yield:
Monthly rental income = £950
X 12 = £11,400 (The annual rental income)
Minus £8,000 (for net yield) = £3,400
Investment = £195,000
£9,400 / £195,000 = 0.017 x 100 = 1.7% Net yield
 
So there we have it. That is how you should calculate gross or net yield.
Of course yield is not the only factor in property investment and the other big reason to invest is of course capital growth.  To get this part right there are lots of things to consider. If you’d like to discuss our local area and it’s potential for growth then feel free to give me a call on 01923 375 300.
p.s. you really don’t have to go through something like this to find a good investment…
yield