Rental yield is the number every landlord should know, and it’s easy to see why. It’s your go-to indicator of how well your investment is performing. But it’s not just about having the number – it’s about understanding how to work out rental yield and using it to boost your returns.
In this guide, we’ll show you how to calculate rental yield and share simple ways to improve it through smart renovations.
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What is rental yield?
Rental yield refers to the income generated from a rental property, expressed as a percentage of the property’s value. It’s a simple way to measure the profitability of an investment property and assess its potential return. A high rental yield indicates that the property is a good source of consistent income, while a lower yield might suggest that there are better investment opportunities elsewhere or the property needs an upgrade.
There are two types of rental yield:
- Gross rental yield: This calculation doesn’t take any costs like management fees, repairs, or taxes into account.
- Net rental yield: This figure includes all expenses, giving you a more accurate picture of your returns.
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Understanding ROI on rental property
Return on investment (ROI) measures the profitability of your property investment by comparing the income generated to the initial cost. It helps you assess how effectively your money is working for you.
To calculate ROI for a rental property, consider:
- Rental income: The total annual income generated from renting out the property.
- Property appreciation: The increase in the property’s value over time.
The formula for ROI is:
ROI = (rental income + capital appreciation) / initial investment × 100
This calculation provides a comprehensive view of the property’s performance, combining both income and value growth.
Understanding net rental yield
If you’re interested in understanding the ongoing profitability of your rental property, net rental yield is a key metric. It accounts for the costs associated with owning and managing the property.
To calculate net rental yield, subtract all your annual costs from your rental income, then divide by the property’s value:
Net rental yield = [(annual rent – annual costs) / property value] × 100
Costs to consider include:
- Property management fees
- Maintenance and repairs
- Insurance
- Council tax (if applicable)
- Mortgage payments
This can give you a more comprehensive understanding of how your property is performing, beyond just the rental income.
Related: Are home improvements worth it?
How to maximise rental yield through smart renovations
Once you know how to work out rental yield, the next step is increasing that yield. One effective way to boost your rental returns is through smart renovations. Property improvements can increase both the rental income and the property’s overall value.
Here are some renovation ideas to maximise rental yield:
Update kitchens and bathrooms
Kitchens and bathrooms are key areas that tenants look at when considering a property. Renovating these rooms can make a significant difference in the rental price. Modern, functional spaces with quality finishes will not only attract higher-paying tenants but also increase the property’s long-term value.
Add extra living space
If possible, consider adding extra living space. This could be as simple as converting an attic, basement, or garage into a functional space. More space often translates to higher rental prices and, therefore, a higher rental yield.
Enhance kerb appeal
The exterior of your property is the first thing tenants see. Investing in simple landscaping or a fresh coat of paint can make the property more appealing and increase its rental potential. A property that looks well-maintained will attract tenants who are willing to pay a little more for the privilege.
Upgrade energy efficiency
With energy costs rising, tenants are increasingly looking for properties that are energy efficient. Simple upgrades such as double-glazing, insulation, and energy-efficient appliances can make your property more attractive to tenants and lower their utility costs, making it easier to increase rent.
Make the property pet-friendly
More tenants are looking for properties that allow pets. If your property doesn’t already accept pets, consider making it pet-friendly, which could open your pool of potential tenants and increase rental demand.
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Maximising your rental yield
Understanding how rental yield works and how to maximise it through strategic renovations is key to increasing your returns.
By focusing on improving your property’s value, you can increase both your rental income and its overall worth. Keep an eye on local rental trends and market conditions to ensure that you’re getting the best return possible on your investment.
If you’re interested in learning more about rental yield or looking for advice on how to maximise your property’s rental returns, get in touch with our local Ellis & Co branch today.
