Rental Yield – a Landlords Guide and to tips to increase it
As a landlord, you’re always looking for ways to maximise your return on investment. One important metric to consider is rental yield, which measures the income generated by a rental property in relation to its value. In this guide, we’ll explain what rental yield is, how to calculate it, and why it’s important for landlords to pay attention to it.
What is rental yield?
Rental yield is a ratio that compares the annual rental income of a property to its value. It’s typically expressed as a percentage and is calculated by dividing the annual rental income by the property’s value and multiplying by 100.
Rental yield differs from other real estate metrics, such as capital appreciation, which measures the increase in a property’s value over time.
How to calculate rental yield:
To calculate rental yield, you’ll need to know the annual rental income and the value of the property.
The formula for rental yield is:
(Annual rental income ÷ Property value) x 100
Let’s take an example of a property which is valued at £500,000 and generates £50,000 in annual rental income, the rental yield would be 10% (£50,000 ÷ £500,000 x 100).
Why landlords should care about rental yield:
Rental yield is important for landlords because it can impact your return on investment. A higher rental yield means more income and a better return on your investment. Additionally, rental yield can be used as a benchmark for comparing properties. By comparing the rental yields of different properties, you can determine which one is likely to generate the most income and provide the best return on investment.
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Top ten tips to increase rental yield
1. Make sure to deduct all of your permitted expenses from your taxable income
Our survey data indicates that 42% of landlords do not deduct all of their permitted rental expenses from their gross rental income, with more than a quarter (27%) of landlords not deducting any expenses at all. Remembering to deduct these expenses from your pre-tax income can improve your net yield by reducing your overall tax bill.
Many rental expenses can be deducted from your taxable income as long as these expenses are ‘wholly and exclusively for the purposes of renting out the property’. Many of a landlord’s biggest operating costs are considered as allowable expenses. The government guidance lists the following:
- general maintenance and repairs to the property, but not home improvements (unless these are incidental to a necessary repair)
- utility bills and council tax
- insurance, such as landlords’ policies for buildings, contents and public liability
- costs of services (including wages for cleaners and gardeners, gas safety inspections,
- letting agent fees and property management fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountant’s fees
- ground rents and service charges
You can read the complete list of allowable expenses here.
2. The same property has a different rental value in different seasons – plan to bring your property to the market when it stands the best chance of achieving its full potential.
Supply and demand for rental property varies significantly across the year and between different regions of London at any given moment. What this means in practice is that the rental value of your property does not remain static, but rather rises and falls in line with seasonal demand in the local neighbourhood. Seasonality can have a significant impact on your rental income, with returns as much as 30% greater for properties that hit their local market in peak season.
You can sometimes control the time of the year your property is expected to be vacant, which has a significant implication on your rental income, by as much as 30%.
For example, if you have new tenants moving into the property in December, and the high yield time of the year for your property is to be marketed in April, you can request that the initial contract will be 16 months long (ending in April the following year), so your property has the best chance to achieve its highest potential rental income.
Peak season in different neighbourhoods is often not what you might expect, and the summer doesn’t always carry the highest demand for specific types of property in certain neighbourhoods. As such, knowing when to advertise your property requires a deep understanding of your local market.
For example, one-bedroom properties in Canary Wharf command the highest rents in April and May (as this is when City workers typically receive their bonuses and there is a lower volume of rental properties available compared with the summer), and their market value declines slightly during the summer months. Elsewhere, multi-bedroom properties in Wimbledon achieve their peak value in June, with high prices sustained across the following three months as families relocate prior to the start of the new school year.
Regardless of when the best time to let your property might be, always make sure to advertise it for let roughly 6-7 weeks before it is going to be available. This will reduce the risk of entering a costly void period, allow plenty of time to ensure you are up to date with your compliance obligations, and enable you to make adjustments to your marketing strategy if it’s taking longer than anticipated to agree a new tenancy.
3. Consider renting your property to students
If your property is located in an area close to one or more universities, you can take advantage of the strong and consistent demand for rental accommodation in the student market.
The primary benefits of renting to students are twofold. Firstly, a group of students will usually require accommodation for a minimum of 12 months (corresponding roughly to the academic year) and may stay even longer if they are only in their second year of study and happy with the property you provide. This reduces your risk of lengthy void periods, leading to lower standing costs that impact your annual yield.
Secondly, students have a tendency to rent in groups of three, four, or five. If you have a multi-bedroom property, renting to multiple sharers will increase your monthly income. Though renting to sharers might mean slightly greater risk of wear and tear or accidental damage, the higher monthly rent will still most likely leave you with a stronger overall net yield.
Read our guide to learn more about renting to students.
4. Refinance your portfolio to get a better deal
If your fixed rate is coming to an end then it’s a great time to explore different buy-to-let products and remortgage your property at a more competitive rate.
Most mortgages begin on a fixed-rate repayment schedule, during which your interest rate goes neither up nor down. When the fixed rate ends, most mortgages will then transition to a standard variable rate will with much higher interest on repayments. At this stage, you can remortgage the property to get a more competitive rate, either with the same lender or a new one. Doing so will give you a new lower fixed rate for a set time, meaning you can lose less of your revenue to paying down your mortgage debt.
Reducing your mortgage interest payments should be high on your list of priorities as an investor, particularly now that landlords cannot claim as much tax relief on their property financing costs under Section 24.
Our free online Finance Hub can help you find the best financing options suited to your needs. Simply complete a short questionnaire and our hub will provide a list of recommendations tailored specifically to your individual circumstances.
5. Touch up your property between tenancies
As most landlords are aware, the condition of a property deteriorates over the course of a tenancy simply through everyday use. Though the presence of wear and tear is unlikely to particularly impact the living standards of any new tenants, a few simple touch ups following the end of a tenancy can help you achieve the best possible deal when the property hits the market.
Tenants view images of your property online before booking in a viewing, and will view several properties in an area before making an offer. A well-presented property will attract more renters through the front door and give you an edge over the competition in a crowded market. Though this is mostly a statement of the obvious, a lot of busy landlords overlook some of the minor details that can help them secure more and better offers from prospective tenants.
Before you put your property back on the market, take care of all those niggling maintenance issues and identify quick fixes that will add value for visiting renters. Common minor, but nevertheless irritating, maintenance issues include problems such as dripping taps, defective door handles, broken blinds, cracks in the walls or flooring, draughty windows and doors, peeling paintwork. To improve the appearance of your property, quick and relatively inexpensive fixes include a fresh coat of paint (preferably in a neutral tone), updating your light fittings, replacing door handles throughout the property, installing a new shower screen, and much more.
Not only will implementing minor upgrades and taking care of small maintenance jobs make your property more visually appealing during a viewing, it will also indicate to prospective tenants that you are a conscientious landlord who cares about the property and the experience renters have while living there.
Investing in your asset between tenancies will pay dividends in more demand for your property, with competition between renters making it quicker to let and potentially even increasing its value.
Don’t forget to update your marketing materials after touching up the property – high quality images and compelling listing copy will help to generate strong demand for your property, meaning you can secure a better deal during negotiations.
6. Think about adding extra furniture to appeal to remote workers
Tenant lifestyle priorities have changed following the pandemic, as the huge increase in numbers of remote workers (first out of necessity, and subsequently by choice) means many of us are now spending much more time in our homes. This is particularly the case in London, which has more people working from home than anywhere else in the UK.
By reviewing what furniture you offer as part of the tenancy and adding items that are useful for home workers, you can make your property stand out to the city’s growing number of flexible workers. A good example would be including extra desks in bedrooms that are likely to double up as a home office, or even providing one or two comfortable and inexpensive office chairs.
Finding ways to add extra storage space for tenants is also a good idea and appealing to renters regardless of their circumstances. This can be achieved by ensuring that there is a wardrobe in every bedroom and adding extra drawers, cabinets, or shelving units where space permits.
7. Invest in your outdoor space
Enquiries on properties with gardens have increased dramatically during the pandemic, as renters trapped inside during lockdown covet outdoor space more than ever before. Landlords who can offer outdoor space can press the advantage by making the garden, terrace, or patio area somewhere tenants can really enjoy spending their summer evenings.
Providing outdoor seating and a table, decorating patios with flowers, shrubs, and other greenery, and finding ways to make the space more private (such as hedges) will make an already desirable selling point into something irresistible to prospective renters, giving your property a leg up over others in the area with outdoor space.
If you have the time and the means, it’s worth getting a professional to tend to a garden so that it looks its best on the marketing materials. This will create even more fear of missing out among people viewing the property listing.
8. Add extra appliances and amenities to appeal to renter lifestyle priorities
You can increase the value of your property by including extra appliances and lifestyle perks that aren’t commonly available outside of dedicated build-to-rent developments. Non-essential appliances and electronics such as dishwashers, washer-dryer units, coffee machines, smart televisions, speakers etc will all allow you to command a higher yield either by creating more offers through increased demand or justifying a higher asking rent. You can also modernise your rental property using smart home technology, such as automated lights, smart security (such as doorbells), smart meters, and smart heating.
Few renters are likely to own many of these items due to the inconvenience and impracticality of moving everything between homes, so providing them at your property would add real value. If you calculate costs carefully, the increase in yield over the lifetime of your investment will be greater than the upfront expense incurred supplying these amenities.
You can also offer paid add-ons to be included within the rent to increase your yield. For example, if you have off-street parking available at the property or with your flat then you can offer your tenants use of this facility for a small premium on top of what it would cost you to maintain or supply it (i.e. the cost of reserving a parking space from your freeholder).
However, take care to ensure that paid add-ons are reflected in the contract in a way that is compliant with the Tenant Fee Act, which bans landlords from charging fees for most services.
9. Consider accepting renters with pets
By allowing tenants with pets to rent a property, landlords can increase their yield by capitalising on the significant imbalance between supply and demand for pet-friendly rental accommodation (with only 7% of rental property listings indicating that pets are welcome).
Due to the scarcity of suitable pet-friendly housing, renters with pets tend to stay longer and take better care of a property compared with other tenants. This reduces the risk of costly void periods eating into your net yield.
The basic economic logic of supply and demand also dictates that pet owners pay more rent. When we surveyed 1000 renters with pets, 55% indicated that they are willing to pay a 5% ‘pet premium’ on top of the asking rent to secure a pet-friendly tenancy.
You can read more about the perks of renting to pet owners here.
10. Use a proptech alternative to traditional lettings agencies and drastically reduce your operating costs
Letting agent fees are notoriously extortionate and often the largest cost incurred by landlords in the course of letting a property. With less high street foot traffic and more renters completing their property search online (even prior to the pandemic), the branch model approach of traditional agencies is much less relevant in the current market. It is therefore difficult to justify parting with so much rental income for a service that can’t deliver the best results.
At Home Made, we are a proptech company rather than a letting agent. We offer a hybrid solution for hands-off landlords who want a hassle-free end-to-end service. We deliver similar cost savings and operational efficiency to DIY proptech platforms and software while also adding value with exceptional customer service, innovative marketing solutions, accompanied viewings, and fully compliant tenancy administration.
Using smart technology we can offer citywide coverage from a single operational hub, allowing us to offer clients annual fee savings of 50-90% (compared with traditional agencies) while also letting properties faster by cross-selling to a far greater audience. With the cost of running a property portfolio rising, now is the time to move away from traditional industry solutions for modern, efficient and cost-effective alternatives.
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Meet Sam your local Expert
Sam has a wealth of experience across the private landlord and Build to Rent sectors. He has advised a wide range of clients across the whole of London on how to find great tenants, improve their assets and effectively market their properties for the best returns.