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Calculate your cashflow, and return on investment period by entering your property price, monthly rent, annual expenses, and vacancy rate below.
Before you purchase an investment property, you can calculate the current rental yield to determine the profitability of the asset. You need to know the purchase price, the current estimated rental return for and cash flow as well as an estimate for operational expenses and average vacancy rates.
You want to keep an eye on your property’s rental yield to ensure that your investments are achieving the returns that are required and make any necessary changes. For example, you might have more expenses than you expected and need to look at ways of reducing these overheads.
Rental Yield is a measurement that investors use to understand an income-generating asset’s performance over the course of a year. It measures how much cash your investment produces as a percentage of the asset’s value. In real estate then it is the rental income as a percentage of the property’s value.
When thinking about rental yield there are two terms you need to be familiar with: gross yield and net yield.
Gross yield is the return on your investment before expenses and vacancies are taken into account. Gross yield also does not take interest rates into account. Gross rental yield is a common metric to look at when analysing returns as it is simple to calculate letting you easily compare properties.
You take the ‘Annual rental income’ and divide by the ‘Property value’. Then multiply this number by 100 to get a percentage value.
Property value £600,000. Expected rent £3,000 a month.
£3,000 x 12 = £36,000
(annual rental income)
(£36,000 /£600,000) x 100 = 6% gross rental yield
Net yield takes into account any expenses or other outgoings such as maintenance costs, mortgage payments and insurance. Net yield is sometimes referred to as a rate of return. Because it takes into account these expenses it gives a more accurate picture of an investment’s cash flow than gross yield.
Take the ‘Annual rental income’ and subtract the ‘Annual expenses’. Then divide this number by the ‘Property value’ and then multiply by 100 to get a percentage value.
Property value £600,000. Expected rent £3,000 a month.
Annual expenses/loss £6000.
£3,000 x 12 = £36,000
(annual rental income)
((£36,000-£6,000)
/£600,000) x 100
= 5% net rental yield
A rental asset should have a positive cash flow even after surprise expenses. You will want to calculate how quickly you can make a property positive after your initial expenses immediately after purchasing the property (eg. renovations).
This should be considered on a yearly basis as well as an overall basis to give yourself the best possible understanding of your property’s cash flow.
This is how long it will it take to breakeven on your investment. We work this out in our calculator from your cash flow, vacancy rate, and property purchase price. However, you should also consider mortgage interest rates when calculating this.
There’s no universal answer to this question. Determining the strength of an investment depends on numerous factors as well as your overall investment goals and intentions.
In an ideal world you’d aim for 7%-8%, however, it is definitely worth noting, that this may not be realistic in certain locations, or necessary if you've a longer term investment strategy that is more reliant on capital gains.
Other factors that should be taken into consideration, include but are not limited to:
Is the property in a desirable location, near amenities, the town centre, schools, or public transport? etc.
How much appreciation has the area experienced over the last 20 years? Have you done work on the property? Did you purchase at a good price? How much CGT can you expect?
Are there any local developments that might damage the property of the value eg. is it on the planned HS2 line? Are there signs of a property bubble? What new legislations might impact profits down the line?
How long do you plan on holding the property?
What is your overall investment strategy? Build wealth for retirement? Supplement your existing cash flow?
A high rental yield is certainly a good thing to have. However, the best investors consider as many facets of their investment as possible to help themselves achieve the best returns from their investment portfolio in the long run.
