Rent yield and capital gain are terms you may have heard many times if you are thinking about becoming a landlord, but what exactly do these terms mean? Although you may have been a landlord for a while, you may still be somewhat confused by the exact definitions of these terms. We have compiled some top tips outlining the two most important aspects of the lettings process to help you get started. A comparison is also made as to whether one should be prioritized over the other in order to maximize returns.
Let’s begin by defining a rental yield. Essentially, a yield is the amount of revenue you can expect to receive from your rental property each year. In order to calculate rental yield, you need to take into account your property’s sale price or current value, as well as the rent you anticipate receiving.
After obtaining these things, you can estimate the potential rental yield on your home. You take the annual rent of a property, divide it by the home’s value and then multiply by 100.
Here’s an example. Your property is valued at £400,000, and your annual rental income stands at £15,000, so your yield would work out as 3.75%. (£15,000 ÷ £400,000 x 100).
Meanwhile, if your home had a current value of £250,000 and your annual rental income stood at £12,000, your yield would be higher at £4.8%.
Even though rental income is often lower on more affordable properties, higher yields are generally generated. This is because the initial outlay is lower, which means yields are less squeezed. You will earn a greater return on investment if your property has a higher yield. A landlord’s prospective rental yield is one of the best ways to determine whether a particular property is a good investment for buy-to-let purposes.
According to most studies, average rental yields in the UK typically sit between 3%-5%, with Wales and the north of England being the best areas for landlords seeking the highest yields.Net yield and gross yield are also important concepts for landlords to understand. In the above calculation, we have calculated the gross yield, however, in order to calculate the net yield (the amount of money you actually earn), you need to subtract all the expenses associated with letting a property from your annual rental.
Capital gain (or capital gains) is sometimes known as capital appreciation or capital growth. In essence, it tells you how much your home will increase in capital value over time based on Ronseal’s phrase. Additionally, it outlines how much you could expect to get if you decide to sell your rental property.
Since house prices in the UK have risen to record levels, landlords have paid much more attention to capital gains.
Which one should you be prioritising?
Investing for the long-term or short-term is more important depending on a landlord’s goals. Think about locations with strong rental yields if you’re thinking short-term. Long-term landlords, however, may target areas (usually London and the South East) with excellent capital gains and steadily rising house prices.
However, landlords are perfectly capable of securing both strong rental yields and excellent capital gains over time. It is not guaranteed, so you may want to prioritize one over the other.
When choosing an investment property, landlords should also consider the fact that rental yields and capital gains aren’t everything. Other factors to consider include tenant demand, the length of time rental properties stay on the market, and calculating what rent you can realistically charge to remain competitive with local market prices.
It is also crucial to consider the location. You should consider the availability of local amenities, access to green space, good local schools, excellent transport links, and easy access to town and city centres when investing in a rental property.
The highest rental yields are usually found in popular commuter towns, especially on the outskirts of big cities. That’s because homes in these locations are normally more affordable – making buy-in costs cheaper – while tenant demand remains very high. As a result, there is an excellent chance to charge higher rents (albeit still realistic ones) and find reliable, long-term tenants to keep your home in good hands.