How to calculate rental yield as a private landlord

As a private landlord, rent is your main source of income. So understanding how to calculate that income over the long term is essential for success. 

In this article, we’ll be talking about rental yields to help private landlords make the best possible decisions.

So, whether you’re renting out one property, multiple properties, or you’re looking to expand, we’re here to help by answering these questions:

• What is meant by rental yield?
• Why is rental yield important?
• How do I calculate rental yield?
• What is a good rental yield?
• How does capital appreciation relate to rental yield?

These questions are designed to help you understand rental yield in regard to income and profits, so we’ll also include an extra section at the end to discuss other things that might affect your overall profits as a private landlord. 

Rental yield is a figure, represented by a percentage, that describes the amount of income you’ll receive from rent payments compared to the total value of the property. 

Landlords, or potential landlords, use it to work out their return on investment (ROI) after a year of rental income. 

Learning how to calculate your rental yield as a private landlord will help you get an accurate picture of how your investment is performing, allowing you to assess long-term sustainability. 

For example, if your rental yield is too low, your income might not be enough to cover running costs and unexpected expenses like repairs. 

Knowing the rental yield of your property is vital for figuring out how much rent you should charge to make enough income, whether or not a property is worth buying in the first place, and for figuring out how affordable a rent-to-buy mortgage would be. 

A buy-to-let mortgage is exactly how it sounds. While many landlords will rent out properties they own outright, some apply for mortgages to buy properties for the sole purpose of finding tenants. 

If you go down this route, knowing your rental yield is vital as it’ll tell you how much profit you can expect to make. 

The actual method for calculating rental yield is pretty straightforward. You only really need two figures:

• The annual rental income.
• The property value. 

Using these figures, you divide the annual rental income by the total property value, then multiply it by 100. 

For example, if you have a property valued at £150,000, and your annual rental income is £10,000, then you’d divide £10,000 by £150,000, giving you 0.06. 

Then, you multiply that figure (0.067) by 100 to get a percentage. In this case, the yield would be 6.7%.

Getting an exact rental yield figure can be difficult if you don’t actually have any tenants yet, so you’ll need to make a realistic guess about how much rent you can expect to charge. 

You can make a reasonable estimate by looking at the average rents in the area for properties of the same size. But things like access to transport links, shops, restaurants, and schools will also have an effect on rent. 

The method we’ve described will help private landlords calculate rental yield is a basic calculation that finds “gross yield”, meaning it doesn’t take other property costs into consideration, like maintenance and insurance.  

“Net yield”, on the other hand, gives you a more accurate representation of your return on investment. The calculation is basically the same, but first, you deduct the expenses from the annual rental income. 

Generally speaking, a rental yield between 5% and 8% is pretty reasonable before running costs are taken into consideration. 

Anything less than 5% is not considered a decent return on investment, even on low-cost properties. This is where a lot of new landlords can find themselves in trouble. 

For example, you might buy cheap property in a highly demanded area, offering a fairly low monthly rent to make sure they find tenants. However, setups like these often find themselves stuck in a long-term rental agreement that has a low rental yield that can barely keep up with mortgage payments or other costs. 

Make sure you run through all the variables when working out a reasonable rental yield to avoid poor financial management that could hurt you in the long run. 

Of course, rental yield is not the only way to calculate the value of your investment. 

The total value of your property will generally increase over time, meaning you can usually sell your property for a higher value than you paid for it. This is called capital appreciation. 

In fact, many landlords don’t even see rental yield as their primary source of profit. Rather, they’ll use the rent to cover mortgage payments, then sell the entire property after it’s been completely paid for. 

Knowing exactly when to sell is tricky because short-term fluctuations in the housing market are pretty standard. However, with a combination of decent rental yield, and selling at the right time, a single property can represent a huge return on investment over time.  

Remember, as a fixed asset, property cannot be immediately converted into its cash value. It will take time to sell, and the process of selling itself will cost money. 

As we briefly mentioned earlier, there are a few things to take into account for private landlords when calculating rental yield. 

For example, there are some monthly costs that you might have to pay for managing your property, including:

• Management fees.
• Landlord’s insurance.
• Maintenance and repairs. 

On top of these costs, it’s also worth remembering that there are also a few things you won’t be able to control when renting property, for example:

• You might struggle to find tenants, leaving your property empty for a time. 
• Tenants might miss rent payments.
• Tenants might move out unexpectedly.
• Tenants might have to be evicted after breaching the terms of your agreement. 

It’s important to bear these unexpected costs in mind when working out the right rates for your desired rental yield. 

Managing your accounts as a private landlord can be stressful and time-consuming. But downloading the Countingup app can make financial admin much easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.