How to Calculate Rental Yield on your Newington Green Property
The low supply of good quality rental homes in and around Newington Green means landlords in this vibrant part of North London can generate healthy returns, despite the government introducing a 3% stamp duty surcharge on second homes.
To work out the level of return an investment property will deliver, landlords with property in North London need to calculate the rental yield – the rental return as a percentage figure of the property purchase price.
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.
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Rental yield vs capital appreciation
Rental yield is not the only factor that determines whether a property is a good investment. Property investors also consider capital appreciation, that is the potential increase in the property’s value. However, with increased uncertainty in the housing market many landlords and investors are looking for steady rental yield rather than significant increase in the value of a property.
How to work out rental yield
To calculate rental yield, you apply this formula:
Rental yield = ((Monthly rental income x 12) ÷ Property Purchase Price) x 100
To calculate your buy to let property investment’s rental yield, start by taking the annual rental income. A luxury two-bedroom apartment in Newington Green commands weekly rent of £450, which adds up to an annual rental income of £23,400.
Next, take the purchase price of the property, which for the above property would be around £500,000.
Add to that the costs that come with buying. The main cost involved in buying a property such as this is stamp duty. Using the HMRC calculator, the tax payable on this property would be £15,000*.
Add an estimated cost for professional fess of £2,000 and you have a total cost of £517,000
Now perform the calculation: 23,400 ÷ 517,000 x 100 = 4.53%
*From 1st April 2021 stamp duty on this property will be £30,000 making the rental yield 4.40%
This calculation assumes the property investment was purchased outright, without the need for a mortgage.
What if I’ve taken out a mortgage?
To work out your rental yield taking a property loan into account, your annual mortgage costs should be subtracted from the £23,400 received in rent.
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.
Subtracting that figure from the annual rent of £23,400 leaves a pre-tax profit of £12,120 per year.
To calculate the yield, take the deposit you put down (£125,000) and add that figure to the buying costs (£17,000). This gives a total of £142,000.
Now perform the calculation: 12,120 ÷ 142,000 x 100 = 8.54%
From 1st April 2021 stamp duty on this property will be £30,000 making the rental yield in this example 7.72%
What is a good rental yield?
Most commentators regard a rental yield of 7% or more as a good return on your property investment. Even the 4.53% yield, if the property is bought outright, is much higher than the interest you’ll receive from a savings account – the best, easy-access rates available are currently around 1.4%.
Points to remember when calculating Rental Yield
A landlord’s true income from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been met. When calculating your rental yields you should bear the following in mind:
It is unlikely that the property will be occupied for 12 months of the year. You might want to stress-test your calculations using 11 months of rental income.
The above rental yield calculations include purchase cost, stamp duty tax, solicitors fees and mortgage costs. However, you are likely to incur other costs both in buying and running your property. Home Buying Surveys, insurance, mortgage arrangement fees, redecorating and maintenance, as well as furniture and white goods, are just a few. You will get a more accurate rental yield figure if you include ALL costs when calculating the income for the property.
If you are considering a property for its investment potential, you don’t yet know for certain how much rent you will achieve. 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 that is achieved so you should test your calculations with conservative estimates of rental income.
Every buy-to-let investment can deliver a different yield depending on the cost of the property and the rent charged. For this reason, the figures quoted above are for illustration only.
Rental yield is not the only factor that determines whether a property is a good investment. The value of property in and around Newington Green is likely to appreciate in value if the investment is held for 10 years or more.
We can help
M&M Property has a database of buy-to-let investors who have expressed an interest in a wide range of property in and around Newington Green, Stoke Newington, Highbury, Islington and Hackney. If you want to maximise the sale value of your property, contact us today and learn what it could be worth.