Rental Yield: Everything you need to know
When looking for a buy to let investment opportunity in Edinburgh, one of the primary considerations for many landlords is the potential rental yield of the property. Find out why rental yield is important, how to calculate both the gross and net yield for an investment opportunity, and the average rental yield achieved in Edinburgh.
What is the rental yield?
The rental yield is a calculation of the annual return on investment that a landlord will make on a buy to let property. This figure is expressed as a percentage.
Why is the rental yield important?
Generating income is the main goal for many investment landlords, and so calculating the yield for a potential investment in advance is an important indicator to assist in deciding if a property is worth investing in.
Although rental yield is important, buy to let investors should also take into account other factors when considering an investment opportunity such as:
- Potential for capital growth/ depreciation
- Renovation requirements and ongoing maintenance
- Local lettings market
Gross rental yield
The gross rental yield provides a useful indication of the viability of an investment opportunity.
To calculate the gross rental yield you need to know:
- Annual rental income (We can provide a rental valuation before you purchase a property, contact us for more information)
- Value of the property
The calculation for gross rental yield is:
(Annual rental income / value of the property) x 100 = Gross rental yield
For example, if a two bedroom property is purchased for £250,000 and achieves a monthly rent of £950, the rental yield would be 4.56%.
Net rental yield
If you would like a more exact figure you can calculate the net rental yield, for this more information is required on the annual expenses for the property. Annual expenses can include:
The calculation for net rental yield is:
((Annual rental income – annual expenses) / value of the property) x 100 = Net rental yield
Edinburgh rental yields
A typical gross yield in Edinburgh city centre is between 4% and 6%.
There are areas around the city, out with the centre, where capital values may be slightly lower but rental value is increasing due to tenant demand, producing strong rental yields. Some newer build developments can also generate a higher yield. In both of these cases, however, typical capital growth has slowed slightly, so investors are trading off capital growth to achieve a higher rental yield.
One way to increase rental yield is to invest in a property that can be improved through renovation. For example, converting a large one bedroom flat with living room and a dining kitchen into a two bedroom property will command more rent and increase the rental yield. Another example would be to convert a box room into an internal kitchen, creating an additional bedroom.
Similarly, moving into the HMO (Houses of Multiple Occupation) market is another way to achieve higher rental yields. Typically let to three or more individuals, HMO properties require a licence from the local council and some additional investment in safety measures such as fire doors, but can provide more certainty of yields nearer 6% or above.
It has been difficult recently to find and buy one and two bed traditional flats due to lack of supply and high demand for first time buyers on any property under £300,000. Due to the deposit required, there is less competition for higher value properties which again may suit the HMO market.
At Clan Gordon we make it our business to know where the best investment opportunities are in Edinburgh. Find out more about our Property Investment Service.