Landlords - here are 5 tips to improve rental yield
- 30th June 2023
- Landlord Property News
How do landlords make sure that their return on investment is as good as it can be?
Calculating rental yield is one method of determining what you can expect in terms of return on investment on your property.
Basically, there are two ways that landlords make money – firstly though the rents received from tenants and secondly, through any increase in value of the property they decide to buy.
The simplest way to calculate the gross rental yield is to divide the annual rental income you receive from a property by the amount you paid for it and then multiplying this figure by 100.
Say you buy a property for £250,000 and rent it out for £1,500 per month – the annual rent is £18,000. Divide the £18,000 by the purchase price and you get 0.072. Multiply that by 100 and you get the gross rental yield expressed as a percentage – in this case, 7.2%.
What constitutes a ‘good’ yield very much depends on the locality and the state of the market. A year ago, average rental yields in London were around 4.1%. Since then, high tenant demand for properties has pushed up rents by 4.8% to March 2023, according to the Office for National Statistics. Many forecasters believe this trend is set to continue well into 2024.
Furthermore, a higher rental yield, often as high a 6%, can be attained by purchasing property such as flats above shops, purpose built and former local authority flats that have lower capital prices but marginally lower rental values than their period and new build equivalents.
When looking at their business in the round, however, landlords also need to take into account the other expenses they incur in letting the property. These might include insurance premiums, maintenance costs, management costs and mortgage repayments.
If these costs are added to the purchase price and the calculation is repeated, you get the net rental yield which will always be lower than the gross figure. And while rental income may be rising for landlords, stubbornly high inflation and rising interest rates have meant that those costs have gone up, too.
So how do landlords make sure that their return on investment is as good as it can be? Here we look at a few of the ways landlords can get the best performance from their portfolio.
- Be shrewd in your initial investment
The key to this is to make every investment a business decision in its own right. Do your research and do your sums. Explore all the potential pitfalls and be prepared to haggle over all the costs you are likely to incur during the investment process. Search out the locations that produce the best yields and keep an eye out for major new developments which might make an area more appealing in the future.
Be vigilant over your costs
Always be prepared to shop around. Have you got the best mortgage deal? Are the insurance premiums getting out of control? Are you paying too much for maintenance and repairs? Even small reductions in any of these will likely boost your net yield.
Keep a close eye on the market
Keep scanning the market and make sure you’re up to date with the correct rate for renting in the area. Rents have risen sharply in recent months, and you need to make sure you set a charge that is appropriate. If you decide to introduce a higher monthly rent, make sure you’re acting within the rules.
Can you extend the property?
Perhaps there’s an opportunity to create a new bedroom through an attic conversion or maybe you can extend to the rear? More bedrooms or extra living space means higher rents and, potentially, better yields.
Boost the energy efficiency rating
Many tenants – especially younger ones – are increasingly environmentally conscious and will be attracted by ‘Greener’ homes. But all tenants will appreciate the savings they can make on heating bills and will probably be prepared to pay that little bit extra in rent as result. Contact an assessor and take some advice about how you can improve the energy efficiency rating of the property – it might pay dividends as well as contribute to the drive to Net Zero.
If you are a landlord or are considering investing in property, feel free to contact us if you have any questions, or would like some advice from an agent who has been operating in the London rental market for 30+ years. Our experienced team are on hand to provide you with all the information you need to get started.
a higher rental yield, often as high a 6%, can be attained by purchasing property such as flats above shops, purpose built and former local authority flats that have lower capital prices but marginally lower rental values than their period and new build equivalents.
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