When researching the best areas to invest in London, you will need to calculate the property’s return on investment. Calculating rental yield allows you to be confident that you can cover all necessary expenses and make a reasonable return.

What is rental yield?

Rental yield describes your annual rental income as a percentage of the total value of the property. It is used by buy-to-let investors to determine whether or not a property will be a good investment or to understand the return on investment of a property they already own.

Capital appreciation

Property investors also make money from capital appreciation, which is the value by which the property goes up over time.

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To estimate capital appreciation, you need to compare the expected price five, ten or twenty years from now with the current purchase price. A knowledgeable local estate agent will be able to help you with this.

Divide the expected gain by the purchase price, multiply by 100 to give the capital gain percentage.

For instance, if today’s purchase price is £400,000 and you expect the property to be worth £450,000 in ten years, the following calculation would tell you the estimated capital appreciation, in this case, 12.5%

  • Price in ten years’ time (£450,000) – Purchase price (£400,000) = Gain (£50,000)
  • Gain (£50,000) ÷ Purchase price (£400,000) = 0.125
  • 0.125 x 100 = 12.5%

Both rental yield and capital appreciation should be considered before purchasing an investment property.

How to work out rental yield

To calculate rental yield, you apply this formula:

Rental yield = ((Annual rental income – Annual running costs) ÷ Investment) x 100

calculate rental yieldAnnual rental income

Estimate how much you can charge in rent, you can look on property portals like Rightmove and Zoopla, or you could talk to a local letting agent. Bear in mind that the asking price isn’t always the amount achieved, so you should test your calculations with conservative rental income estimates.

Multiply that amount to get the total rent you would collect in a year. For weekly rent, multiply by 52. For annual rent, multiply by 12.

Most landlords experience void periods at some point. We recommend you stress test your calculations based on 11 months of rental income.

Annual running costs

Most online rental yield calculators and estate agents don’t include running costs, giving a much higher and unachievable rental yield. True rental income is the amount of rent left over after your expenses have been met. Typical landlord costs include:

  • Annual mortgage costs
  • Insurance
  • Maintenance costs
  • Letting agent fees
  • Council tax and utility bills during void periods

Investment

If you bought the property in cash, this is the purchase price of the property. For property purchased with a mortgage, use the deposit you put down.

Add the following costs that come with buying:

  • Stamp duty
  • Solicitors fees
  • Survey fees

Include any costs you incur getting your property ready for rental, for instance, redecorating and buying furniture and white goods.

Example of rental yield on a Newington Green property

A luxury two-bedroom apartment in Newington Green commands weekly rent of £450, which adds up to an annual rental income of £23,400.

The purchase price of the above property would be around £500,000.

The stamp duty would be £15,000. Add an estimated cost for professional fees of £2,000.

It is impossible to predict exactly what maintenance your buy to let property will need, but property experts recommend budgeting for spending 1% of its value per year. In this case, £5,000 per year.

Example rental yield in Newington GreenPurchased without a mortgage

  • Annual rental income (£23,400) – Running costs (£5,000) = Annual profit (£18,400)
  • Purchase price (£500,000) + Buying costs (£15,000 + £2,000) = Investment (£517,000)
  • Annual profit (£18,400) ÷ Investment (£517,000) = 0.036
  • 0.036 * 100 = 3.6%

Purchased with a mortgage

Say you took out an interest-only buy to let mortgage for 75% of the purchase cost (£375,000) at a rate of 3%. Your monthly mortgage payments would be £940, or £11,280 per year.

  • Your deposit is £125,000 (the remaining 25% of the purchase price).
  • Annual rental income (£23,400) – Running costs (£5,000 + £11,280) = Annual profit (£7,120)
  • Purchase price (£125,000) + Buying costs (£15,000 + £2,000) = Investment (£142,000)
  • Annual profit (£7,120) ÷ Investment (£142,000) = 0.05
  • 0.05 * 100 = 5%

What is a good rental yield?

There is always a demand for rental property in and around Newington Green, but a relatively high market price means that buy to let property must work hard to generate a healthy return. In London, anywhere between 5-8% is considered an excellent rental yield.

The best rental yields in the UK by area in 2020

So, where in the UK offers the best rental yields? Landlord Today have analysed average house price data and average rental data. The top ten areas in the UK for rental yields are:

  1. Manchester
  2. Sunderland
  3. Nottingham
  4. Newcastle
  5. Leeds
  6. Birmingham
  7. Liverpool
  8. Portsmouth
  9. Southampton
  10. Bradford

We can help

M&M Property have a range of homes for sale in and around Newington Green, Stoke Newington, Highbury, Islington and Hackney. If you are looking to invest in property, we can help you maximise your returns. Contact us today.