Rental properties are, at the most basic level, a financial investment for landlords. Calculating rental yield is therefore an essential part of renting out a property, as it’s the way you figure out your return on investment (ROI).
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In this article, we’ll look at how to calculate yield on a rental property, along with things you can do to increase it.
Calculating rental yield: What is it?
Put simply, rental yield is the amount of money you make on a rental property. It not only helps you to know how much money the property makes but it also factors in things such as the market and interest rates.
Knowing how to calculate yield on a rental property is fairly easy, as long as you’re aware of your figures. To work it out, you divide the annual rent amount by the property purchase price, and then multiply that figure by 100. For example: You bought the property for £180,000. Your tenants pay £900 a month in rent, meaning the annual rental amount is £10,800. Divide this figure by the purchase price and multiply by 100 to get a rental yield of 6%.
As with any other business calculation, we need to know both the gross and net amounts:-
Gross rental yield: The full amount before factoring in expenses.
Net rental yield: The true amount you’ll get after expenses, such as insurance, maintenance, etc.
Why is rental yield important?
Knowing your potential rental yield is vital because it’s what will inform your decisions. For example, it’ll help you know how much rent to charge, what scope you have for managing emergency expenditures, and whether the investment is actually worth it.
Of course, rental yield isn’t the only thing you need to think about here. The property’s value and desirability both impact the rent you can charge. Things like location, size, amenities, property condition and market trends will all have an effect.
How to improve your rental yield
There are several ways you can improve your rental yield. It’s worth analysing the risk of each to see if it’ll benefit you enough to make it worthwhile. Some examples include:
Raising rent
The obvious starting point is to raise the rent. However, this is one of the riskier moves if you haven’t actually done anything to improve the property’s value. It’s arguably better to have a lower ROI from a stable tenant than to raise rent and have your property sit empty for a while.
Reduce costs
On the flip side, you can reduce your costs. For example, you could change (or stop using) a property management company, switch insurance providers, and so on. Again, this is a riskier move because there are only so many costs you can cut.
Improving tenant retention
This was briefly mentioned above, but improving tenant retention is often essential for improved yield. If nothing else, it means your property isn’t sitting empty on the market. Landlords in busy areas might not have this problem, but if you’re letting a property in a less than ideal area, tenant retention is essential.
Property upgrades
Upgrading your property is one of the clearest justifications for increasing rent. If you have a decent, modern kitchen and bathroom, efficient heating and insulation, and other factors, the property is instantly more desirable.
A lot of this comes down to increasing the property’s value, which can justify a rent increase. Importantly, though, it’s about making it look nicer and creating a more functional home, which can increase tenant retention.
However, you must factor in the cost of improvements when calculating rental yield. Specifically, these would be “expenses”, which will pull down your net yield. Draw up some rough calculations to see what impact this would have.
Furnishing the property
Perhaps one of the easiest ways to increase your ROI is to furnish your property. Fully furnishing it can allow you to increase rent by 15-20% on average. Landlord furniture can be a blessing for a lot of tenants, particularly if they’re moving from a different fully furnished property.
Of course, figuring out a home’s worth of furniture can take a lot of work. Instead, try landlord furniture packages to easily furnish an entire room or even the whole property. Furniture packages are a straightforward way to increase your rental yield because of the potential increases they can offer.