# Rental Yield And Return on investment

If your plans are buying for let, considering rental yield is essential. But if you are planning on selling you should be prepared for the possibility of a volatile market. Also in case of recession, you could remain with your property which cannot be shifted.

## What is rental yield and return on investment

To calculate rental yield, you measure rental income annually against property value. 10% makes quite a good gross yield which can dramatically increase with many occupants, for instance, student lets. If you are planning on selling properties, your aim should be not less than 30% return on investment.

For you to succeed in the buy-to-let strategy, the key is generating income. Rental yield is the simplest way of calculating how much income which is generated by a property. Rental yield generally is a percentage figure of the rental return of the purchase price of the property.

Below is a link to a calculator which you can use to calculate the property rental yield. Using the calculator, you can compare yields in various areas and buy opportunities on the basis of property price and the rent which you are charging.

Typically, these are the figures used while selecting the best buy-to-let returns. For instance, on the basis of data collected from 2015 first quarter, Lendinvest Index indicates rental yield in average for one-bed property throughout the UK is 5.9%, compared to two-bed at 5.3%, three bed at 4.7% and four-bed at 4%.

If your property worth 150,000 pounds you are charging 9,000 pounds yearly or 750 pounds monthly, that means you property yield is 6%.

In reality, however, this cash translates to what you would get by purchasing the property outright. If you use mortgage, the actual return differs.

### Calculate your buy-to-let yield

For you to succeed in the buy-to-let strategy, the key is generating income. Calculating rental yield indicates how much income which will be generated by a property. Rental yield calculation is a percentage figure of the rental return of the purchase price of the property.

The first step to calculating your return annually or rather the yield is minus the costs of mortgage from the amount the rent is totalling to. This is because any earned rent is required to clear mortgage payments before taking any profits.

For instance, you would like to loan 110,000 pounds to be repaid 150,000 pounds translating to 73% loan-to-value.

At that level, Santander can offer a mortgage-free from competition at a rate of 3.64%. therefore, for 110,000 pounds only interest, every payment of 334 pounds are made or yearly payment of 4,008 pounds.

If your charges are 750 pounds monthly or 9000 pounds yearly.

Subtract from rental income the mortgage payments and it would result to 4992 pounds.

So as to get the return on investment for the property, you calculate the sum above as a percentage of the much you spend to purchase the property.

The deposit you will be paying is 40,000 pounds but other costs attached to buying will be catered for such as survey, legal and stamp duty fees. For the case above, you will pay 500 pounds for stamp duty and 1500 pounds for the other costs attached to buying. This would result in a total deduction of 42,000 pounds.

Calculating from rent after deducting mortgage which is 4992, the annual return on investment becomes 11.9% for the 42,000 investment.

### Points to remember

When calculating BTL property yield, there are some things to put into consideration. Such include:

#### Void periods

Most people overlook void periods and this might lead to calculations skewing. While calculating yield, put in mind that it’s not likely the twelve months of the year will see your property fully occupied all through. Therefore, total income will not be monthly rent for 12 months. Void periods will be there either at the start of the investment or between tenants occupation. Therefore, you can stress-test your rental income calculations using 11 months’ income worth.

#### Rent

If you are researching on the much you should quote as rent for your investment, you can consider visiting portals such as Gumtree, Zoopla and Rightmove to check what similar properties in the same locality are demanding. You can also seek for advice from letting agent in the locality. However, in all instances, keep in mind that asking prices will never be achieved amount.

#### Total costs

While calculating yield you should use the exact figures for accurate calculations. Therefore, when making calculations of the total amount invested it should also include all the costs that may include:

- White goods or furniture cost
- Running cost in void periods such as utility bills and council tax
- Maintenance or redecorating cost
- Any legal fees
- Survey fees
- Solicitor fees
- Arrangement fee or mortgage product
- Insurance
- Tenant acquisition
- Property cost

When calculating yield calculations, be very careful with your numbers. To succeed with the buy-to-let strategy, generating income is the main consideration. Rental yield is the simplest way of calculating the much income which is generated by a property. most people overlook void periods and this might lead to calculations skewing.

Remember that it’s not likely the twelve months of the year will see your property fully occupied all through. Therefore, total income will not always be monthly rent for 12 months. Rental yield is a percentage figure of the rental return of the purchase price of the property.

When you overhear developers or agents talking of yields most at times such talks sound attractive and incredible and it’s from this point you should begin questioning yourself.

Most of the developers and agents calculate yields based on things like property basic cost while ignoring costs which come along with purchasing the property as mentioned above. Therefore, with such costs excluded, the return escalates making the deal seem sweeter than it should be. As a buyer, beware of offers which sound too good to be true.

**References: **

startups.co.uk

thisismoney.co.uk

propertyinvestmentproject.co.uk