What is a buy to let yield?
In really simple terms, your buy to let yield is the profit you make on your rental property once you subtract all of your outgoings.
Why buy to let yield is important
Lenders will use the buy to let yield of the property as a gauge of whether it’s a good investment.
It’s also a good measure for you as you’ll be able to work out what kind of profit you are likely to make while you own the property, and if you’ll make enough money back on your investment to cover your mortgage payments.
What's the difference between buy to let yield and capital appreciation?
Capital appreciation is another way that buy to let investors measure how profitable a property could be. Capital appreciation is a projection or estimate of how much the property might increase in value over time.
While some investors prefer to know how fast they can make a profit, it often doesn’t account for fluctuations in the property market.
How do I work out a buy to let yield?
You can work out your yield in two simple steps, you just divide your profit by your deposit.
Step 1: To get your profit, subtract your expenses from your rental income
Step 2: Divide your profit by your deposit
Here's an example:
You've found a property worth £200,000 and have £50,000 for a deposit.
If you borrowed the remaining £150,000 over 25 years at 3%, your mortgage would be £711 a month (or £8,532 across the year).
Now, let's say you charge £1,750 per month in rent, earning you £21,000 a year.
Next you factor in your outgoings. That includes £7,500 in Stamp Duty and around £2,000 for other related costs, totalling £9,500.
So, with your mortgage payments and costs, you'll pay just over £18,000. Since you're earning £21,000 from the property, that leaves you with just under £3,000 profit. Divide that by your deposit and you're left with a yield of 6%.
When you add up the outgoings for the property, consider some of the following:
- Your mortgage payments
- Landlord related Insurance policies
- Maintenance and repair bills
- Empty periods without tenants
What influences buy to let yield rates?
One of the biggest factors that can determine your rental yield is how attractive the rental market is in the area you are buying. Neighbourhoods with a large student population for example will mean the demand for rental properties will always be high.
There are free indexes out there that can give you a ballpark figure on what you can expect based on the property size and location and can be a good resource while you’re researching where and what to buy.
Once you have your buy to let yield figure, factor in how it could change in the future. While your profits could be great now, if they drop the amount you owe and need to repay remains the same. Losses can be tax deductible but get advice from a financial planner or tax expert if this is the case.
How to maximise your buy to let yield
There are a couple of things to think about when trying to maximise your buy to let yield.
Investing in good rental areas, reviewing rent frequently and sizing up the ongoing costs of managing the property yourself or through an agency will all impact your yield.
Similarly, the bigger your deposit, the better your mortgage offer will be and therefore how much your repayments are.