The simplest way of calculating a rental yield is to determine the Gross Rental Yield. This will provide a rough estimate of how well a property is performing as an investment.
To calculate the Gross Rental Yield, you must know the annual rental income and the property value, which could either be the purchase price or the current market value. To calculate Gross Rental Yield, first, divide your annual rental income by the property value and multiply the result by 100.
A landlord lets his property out for £600 per month (£7,200 per annum) and he paid £144,000 for the property. So, the gross annual yield is 7,200 divided by £144,000 = 0.05. Multiplied by 100 = 5% Gross Rental Yield per annum.
This calculation needs to be undertaken on a regular basis as the property market is fluid and levels of rent together with property values will fluctuate constantly.
One can then compare the efficiency of this investment with other forms of investment such as stocks and shares or savings accounts. Traditionally, savings accounts are safer but the yield will be more conservative whereas one can potentially enjoy greater yields with stocks and shares but the market can be more volatile.
The Gross Rental Yield calculation is a useful but basic way of ascertaining whether the property is providing an acceptable yield. To obtain a more useful figure, one should calculate the Net Annual Yield. To do this, one should deduct agent’s fees, maintenance costs, service charges, insurances, compliance costs and average void periods from the gross annual rent received. One should also add the cost of furniture, cost of improvements to the property, legal fees and taxes paid when one acquired the property to the value of the property. This list of additions and subtractions is not exhaustive. If one has acquired the property with the assistance of a mortgage, this will also have a bearing on the profitability of the investment, as interest rate fluctuations will affect the net income received.
Please contact Arkade Property if you would like to discuss this article in more detail or if you require any assistance or advice concerning the letting out of your property.