Rental yield measures the annual return an investor gets from a property investment based on its purchase price or market value. There are two types of rental yield: net and gross. Net rental yield takes into account annual expenses, whereas gross yield is purely calculated based on the rental income and property value. Many people think the only way to increase their rental yield is by increasing the rent. However, this isn’t the case, and in fact it could result in decreasing your rental yield as it could result in longer void periods. Throughout this article, we will cover several factors that affect the profitability of a property.
Property Location
Location is often one of the biggest influences on rental yield as you’re able to charge more in high-demand areas, which also contributes to the property never being vacant. The perfect balance is when you’re able to buy a run-down property in a good area, as the purchase price will be considerably lower, and then you can renovate the property to increase its market value, making a profit on both the property value and the rental income. You might be wondering, but what makes a location good? Here are some factors you should consider:
- Transport links
- Schools
- Universities
- Employment opportunities
- Local amenities
Before you invest in any property, it is really important to carry out research in the areas you are looking to buy.
Purchase Price
As we mentioned in the introduction, there are two main contributors to the rental yield calculation: rental income and purchase price. You may think there isn’t much you can do about a purchase price, but there are definitely some things you should consider. Firstly, make sure you’re not paying above market value for your property. Once you have paid the above-market purchase price, it will be hard to charge enough rental income to offset the purchase price.
This is even more reason why it is important to never accept the first offer and to negotiate the best possible price. During this process, it is worth researching what similar properties in the area are worth so you have a number to go off of. Don’t forget that other costs are associated with purchasing a property, including stamp duty, legal fees, surveys, and renovation costs.
Monthly Rental Income
The second main calculation contributor is rental income. It tends to have a direct impact; when the rental income is higher, the rental yield tends to be higher. The amount of rent you charge should reflect a number of things, such as property condition and local market rates. To be able to increase your rent, you could consider making some small improvements to the property to be able to increase the rental value. The easiest way is by modernising your property. This doesn’t have to include a whole new kitchen and bathroom, but a simple lick of paint throughout the whole house and some simple changes, like also painting cupboard doors in the kitchen and swapping handles for a more modern choice, will make a huge difference. Another thing that goes a long way but might be pricier is reflooring the whole property. Before making any changes to your property, you should always forecast how much value the renovations will add and make sure you will make more than the cost of the renovations.
Running Costs and Expenses
Whether you are forecasting using net or gross rental yield, it is important, either way, to know what your net rental yield is. This takes into account all expenses that come with renting out the property, such as letting agent fees and maintenance costs. A net rental yield gives you a more accurate return on your investment. It would be a good idea to use a rental yield calculator to help create accurate estimates, which you can use to make informed decisions before committing to a new property investment.
Tenant Demand
Most people will calculate their profits presuming their properties are always going to be occupied, but unfortunately, this isn’t always the case. No matter how high the forecasting rental yield is, if your property isn’t occupied, the actual annual rental yield will decrease every day it is vacant. Of course, some vacant periods are unavoidable, for example, if your current tenant has to move location for their job. Especially now, the 2-month notice period has come into play. Minimising void periods should be a priority for every property investor. Several factors influence the occupancy of a property, including how well the property is presented, the competitiveness of the rent and the level of demand in the local market.
There are a few things you can do to ensure you’re providing good property management to your tenants. The main ones are ensuring maintenance issues are dealt with as quickly as possible and trying your best not to increase rent unnecessarily. There are a lot of greedy landlords out there. For most investors, retaining long-term tenants is more cost-effective than having a high turnover of tenants. This will help to maintain a consistent rental income to maximise your overall yield.
Conclusion
Rental yield is influenced by more than the amount of rent. From choosing the right location to negotiating the best purchase price, all have an impact on your overall returns. The main thing is to make sure you complete thorough research before committing to investing in a property.
