So what is considered a "good yield for your rental property? In a perfect world, 7-8% would be the ideal rental yield. However, things are a little more complicated. Typically, a property with a high rental yield implies that it is undervalued or below market value. This is usually considered to be between 8 and 10%.
Whereas a property with a low rental yield, which is between 2-4%, may mean that it is overvalued. Yields above 8% seem ideal. If it were that easy, we would all be happy. However, the story is more complex.
Selecting a property solely on the basis of its high yield can have some consequences. Many investors have realised that high yielding properties can come at the cost of poor capital growth, negative cash flow or higher risk. Yes, many aspire to a property that has a rental yield of around 7%. But you also have to have a good location, good capital growth and good tenant demand.
The answer to what is a good rental yield depends on where you plan to buy. Gross rental yield in real estate is expressed as a percentage and measures the total amount of annual rental income compared to the price of the property. To be sustainable in the long term, the rental income must cover the running costs of the property and - I never tire of repeating - a contingency budget is also needed. To calculate the gross rental yield of a property, divide your annual income by the value of the property and multiply that figure by 100.
So if your property was bought for £200,000, and you earn £10,000 a year in rent, you would have a rental yield of 5%. Net rental yield is a calculation used to measure the potential yield of a property once operating costs have been taken into account. Gross rental yield is not a reliable indicator of whether a property will have a positive or negative cash flow, whether it will have future capital growth or whether it will be a high-risk investment. That said, the profit on the properties is 57% over the period of ownership or around 9 nual (some were in a state and have been refurbished producing large profits in the first year of ownership) so a total return of around 18%.
Granted, you may get some of the best rental yields by renting to students, but, for a long-term investment, you may want to think about your options. When investing in property, the most important thing is the ability to calculate the rental yield. Before you can analyse what is a good rental yield and what is not, there is a key distinction to be made. Gross rental yield is a good selection tool for choosing properties that generate higher rental income compared to the value of the property.
After using the gross rental yield calculation to narrow down the list of potential properties to purchase, an investor can calculate the net rental yield of each property to better understand the profit potential of each property. When investors focus too much on other factors of a property (downplaying the importance of a good rental yield in their calculations), that is when they run into problems. By dividing the actual or estimated gross rental income by the property's sale price or market value, an investor can quickly calculate the property's gross rental yield to see if it measures up.