When considering investing in buy-to-let property, it’s important to calculate the rental yield so you know the potential income you could earn. But how do you work it out, and is it the only factor to consider?
The rental yield is the amount you can expect to make annually from your property – the gross figure is the total rent, while the net provides the amount you’ll earn from the property once expenditure such as mortgage, insurance and agent’s fees are taken into account.
The rental yield figure is expressed as a percentage, and with typical lettings in Edinburgh the average is around 6% which makes it an attractive proposition for investors. Edinburgh is a bustling hub with excellent shopping, restaurants, attractions and transport connections, and rental properties are always in high demand.
Calculating your profit is not the only factor to consider
Most buy-to-let properties are bought as an income-generator, so calculating how much annual profit you’ll make is often a crucial factor in deciding whether it’s worth the investment. However other factors should be considered including the best location for lettings in Edinburgh, which will dictate how easy it is to find tenants, the cost of refurbishment and ongoing maintenance, the potential for growth or depreciation and the strength of the lettings market.
New build developments can often command a higher rent, and therefore a higher yield, and investing in a property which can be renovated or converted is also a good strategy. A large one-bedroom flat with a separate dining room can be turned into a two-bedroom property – any increase in the number of bedrooms will raise the potential rental yield.
Another way to increase yield is to rent out the property as a house of multiple occupation (HMO), such as student houses. This requires a special licence from the local authority, and additional safety measures such as fire doors, but will provide a higher yield.
So how is rental yield calculated?
To come up with a figure, you’ll need to know the annual rental income. Clan Gordon has more than 13 years’ expertise and experience in the Edinburgh lettings market and can value a property before you purchase to give an accurate rental figure. We can also advise on the most desirable locations and offer a wealth of advice before you decide to take the plunge.
The calculation for gross rental yield is:
Annual rental income divided by property value x 100
For example, a property purchased for £250,000 with a monthly rent of £1000 would have a rental yield of 4.8%.
To calculate the net rental yield, you need to subtract the annual expenses:
Annual rental income minus expenses divided by property value x 100
For example, a property purchased for £250,000 with a monthly rent of £1000 and monthly expenses of £450 would have a rental yield of 2.64%.
Clan Gordon offers a free valuation service. For more advice about property rental yields, how to get the most out of your property investment, or any other buy-to-let issues, schedule a call with our team today.