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What is Rental Yield?

Apr 21 2017 10:40:00

It’s often the first question we’re asked by new or aspiring landlords and property investors. Once they know what rental yield is, they usually follow up with: “OK, now why do I need to know this - what does it tell me about a buy-to-let investment?”

What is rental yield?

Put simply: rental yield is one year’s rental income, shown as a percentage of what you paid for the property.

For example:

You buy a house for £100,000. You add your costs (eg redecorating or a new bathroom) of £3000.

TOTAL INVESTMENT = £103,000

You charge your tenants £700 rent a month.

Over one year, that adds up to £8,400.

700 x 12 months = £8,400 income in one year.

You take away your costs (like repairs and maintenance) of £500.

TOTAL ANNUAL INCOME = £7,900

Rental yield shows you: “what % of £103,000 is £7,900?”

To show the rental income as a percentage of the property price, you divide it by the property price and multiply the answer by 100.

 So,  £7,900 = 7.7% of £103,000

 RENTAL YIELD = 7.7%

Why is rental yield important?

But… why does this figure matter? Why should an investor know what their annual income is as a percentage of their investment?

Think about it: it tells you how much your property pays you back every year.

The higher the rental yield, the more money you are being paid back every year. Your property is paying you back quicker.

A property with a 10% rental yield is paying you back 1/10 of your investment every year.