I am starting to explore the option of becoming a landlord, but feel a little daunted. Terms like rental yield, not to mention how its calculated strike terror into my heart and make me worry I won’t make good business decisions. Do you have any tips?
Dear Hopeful Landlord
A Understanding rental yield is paramount for a successful investor – whether you are buying a property outright or funding the investment with a buy-to-let mortgage.
As a landlord, you can make money from your asset in two ways. The first is capital growth, which is when your property’s value increases due to market forces. The second is through rental income – the money you receive as rent from your tenant.
Many confuse rental income with rental yield. For a novice it’s an easy mistake to make, but it’s important to understand the difference. In layman’s terms, rental yield is a measure of the return on a property investment.
I believe the best way to calculate it is to establish the initial investment by adding together your deposit and any other costs, such as stamp duty.
Work out the total mortgage repayments made in a year. Then calculate how much rent is collected from tenants in 12 months.
Then you can calculate the gross rental income by taking the latter away from the former. You then have to deduct costs to get the net rental income.
Using this figure, you can then calculate the net rental yield for a year.
This is done by dividing the net rental income by your initial investment figure.
Multiply the result by 100 and you should get a percentage result for the yield.
It’s worth noting that typically mortgage payments may be higher than the rental yield.
But over time, assuming that the investment was well-made, there should be both capital growth and a healthy rental yield.
Dawn Sandoval is the owner of Dawn Sandoval Residential in Canary Wharf .