One of the most significant considerations for tenants and property owners to evaluate when buying a property is the return on investment, also known as the rate of return on rented property or return on capital (ROI).
Although considerations such as house size, place, and luxurious amenities are relevant, the UK housing market has long passed the stage that buyers can be confident that they will be able to flip their properties in a year or 2 for a profit that will mitigate any short-term losses.
Maybe it’s because of low incomes or just personal choice, the number of investors in the UK real estate sector has dropped dramatically in recent years, forcing property owners to change their mindset in order to stay profitable in this modern context.
If you’re buying your first rented house or making a contribution to an existing portfolio, the first thing you can do is measure the return on investment. Calculating a rental property’s rental yield, as a general rule, is the most accurate way to measure the ROI
ROI as rental yield
To figure out your rental yield, divide your property’s rental income by the purchase price. In most cases, this is expressed in percentage.
This is achieved by selecting the total amount of rent and subtracting all operating expenses (loan payments, insurance, renovations and repairs, and so on), and splitting the result by the total amount you spent to buy the home (this should include all fees; including taxes, legal fees, survey fees, etc.). It’s important to remember that the higher the yield, the better.
Rental yield calculation example
Elizabeth has saved enough money, has all of his papers in order, has met with his mortgage agent, and is now looking for a rental property. Elizabeth likes two of the properties she sees. The first property costs £150,000 with a potential rental return of £750pcm. The second property costs £1750,000 with a potential rental return of £900pcm.
Rental Yield Formula:
mri = monthly rental income
tpp = total purchase price
Rental Yield = mri*12/tpp*100
Monthly rental income = £750
Investment = £150,000
£750 x 12 = £9,000
£9,000 / £150,000 = 0,06
0.06 x 100 = 6 % yield
Monthly rental income = £900
Investment = £175000
£900 x 12 = £10,800
£10,800 / £175,000 = 0,061
0,061 x 100 = 6.1% yield
Property 2 may seem to be the better investment at first sight because of its higher rental revenue, but Property 1 actually has a higher rental yield due to its lower purchase price. Property 1 is, thus, the stronger investment
However, it’s important to keep in mind that these yields will fluctuate over time as house prices and rental income levels fluctuate.
What is a good return yield percentage?
For a BTL house, a good rental yield is 4-5 percent or more. Any property with yields below this amount risks not generating enough revenue to meet operating expenses, such as continuing repairs, debt payments, and the unpredictable, costly issues that invariably arise when investing in real estate.
Rental demand or capital expansion in high-demand areas can be very appealing. Furthermore, properties that are below market value may seem to be a decent opportunity. Fortunately, if the rental yield is just 3%, the monthly revenue would be insufficient to support your mortgage payments.
Of course, if you don’t want to think about doing this complicated equation, there is a lot of proptech tools that will help you out. For eg, DealSourcing.co is the most reliable and truthful sourcer available. This proptech technology is able to simplify the process and transform it into a portal that acts as your personal real estate hunter. The platform will locate properties from all over the internet and sort them by ROI thanks to algorithms and automation.
It will help you save time, money, and effort! The platform’s key advantage is its ability to find high-yield properties. If you’re trying to invest in Buy-To-Let homes, DealSourcing.co is a no-brainer.
The software also measures the BMV for every property listed on Rightmove, Zoopla, or Gumtree and locates properties for sale that are under market value, saving customers hours of analysis time.