21/03/2024

21/03/2024

Rental Yield

What is rental yield? Simply put, rental yield is the financial return that a landlord and investors are to achieve from renting out their property. Commonly used by landlords and real estate investors the rental yield calculation is used in conjunction with other factoring information to make a decision on a property’s profitability.

What is the best type of rental yield to use? 

There are two types of rental yield. Gross and Net.  Gross rental yield does not factor in any expenses and focuses solely on the price of the property compared to the earnings from rental. This is a quick way for a landlord to get a quick snapshot of the return the property is making. Although an efficient and time saving calculation, the lack of expenses considered for the calculation leaves it not as accurate as the net yield measure. The net rental yield helps a landlord understand the expenditure on their properties. This yield calculation includes both the costs and income that are generated during the rental of the property. The inclusion of a wide array of costs that the landlord can include to ensure the yield is accurate and is ideal for a calculation on a buy-to-let property. 

What is a good yield?

A good rental yield can be affected by several external factors, and it is key to consider when planning on investment or calculating a current investments yield. External economic area factors, the type of property being rented and, location, location, location. Generally, a rental yield of around 4% to 10% is often considered reasonable for residential properties in many markets. Market yield can be broken down into three return rates of low market yield, usually around 4-5%, moderate market yield, 6-8% and high market yield of 8-10%. 

How to calculate a rental yield

The yield is calculated by calculating the money the landlord puts in and the returned earnings that comes from the property.

The Gross Yield

  1. Calculate your annual rental income by multiplying the monthly rental income by 12, or the weekly rental income by 52.
  2. Divide your annual rental income by the price of the property.
  3. Multiply this figure by 100. 
The answer you get will be your gross rental yield percentage.

Th Net Yield

  1. Calculate your annual rental income.
  2. Subtract your annual costs.
  3. Divide this figure by the price of the property.
  4. Multiply this figure by 100. 
The answer you get will be your net rental yield percentage.

How to improve your rental yield

As mentioned above rental yield is affected several external from property location, demand in the property market, and interest rates. There are a number of ways that the landlord can increase their earnings.  

Adjust the rent.

Adjusting the rent is a key consideration for the landlord. Setting it too high will make it difficult to let the property and too low will affect income and raise the yield. This decision can be made using the external factors of the market of demand and average rental price in the location.  Raising rent in a high demand location will increase income and lowering rent in low demand areas will ensure tenancy increasing income. The landlord must not forget to consider current tenants’ contractual status as increasing the rent may lead to the tenant moving out. 

Aim for long-term rentals.

High turnover I rentals can lead to increased costs through maintenance, agency fees, advertising and reduced earnings due to vacancy.  Longer-term rentals can reduce the turnover of tenants, in turn reducing these costs that cut into your rental yield.

Evaluate your providers.

Interest rates can be a huge cost on a rental yield calculation and one savvy way to reduce this cost is to shop around providers. It might save time to stay with the current provider, but it could be costing money. This is also true for insurances. 

Become more hands-on.

Cut costs and do it yourself. Again, this is a time vs cost scenario, but the cost savings could be significant by cutting out third parties for small maintenance jobs like painting and cleaning. 
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Take control of viewings and lettings to increase income by decreasing expenditure on letting agents and management companies. Although this could go a long way towards maximising your rental yield, becoming more hands-on isn’t for everyone and might not be possible for someone who has a lot of engagements. 

Conclusion 

The rental yield calculation is a vital tool for real estate investors and landlords for quick analysis of their properties. Ensuring the correct yield calculation is chosen can ensure that relevant information is gathered, and steps can be taken to improve their yield.
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Reach out to our team of experts for more information at info@cooneycarey.ie.