Understanding how to maximise your investment returns
Whether you are contemplating your first buy-to-let investment or you are an experienced portfolio landlord, there is much to consider when letting out a property. As with any investment, rent yield is crucial, and landlords should focus on this metric.
Rental yield measures the annual return on investment from renting out a property. It is calculated by taking the annual rental income and dividing it by the property’s purchase price (or value).
What is rental yield?
For instance, if you bought a property for £100,000 and achieved a rental income of £5,000 per year, the gross rental yield would be 5%. This metric allows you to compare the return on investment from different properties, thereby identifying which may offer better financial prospects.
A higher-yielding property will generate more income relative to its purchase price, making it a potentially more advantageous investment. Understanding this distinction is vital for making informed decisions about your property portfolio.
Calculating rental yield
There are two primary types of rental yield: gross yield and net yield. Gross yield is the simplest way to calculate rental yield, involving just the annual rental income divided by the property’s purchase price (or value).
Referring to our earlier example, if you purchased a property for £100,000 and brought in £5,000 per year in rental income, the gross rental yield would be 5%.
Understanding net rental yield
Net rental yield provides a more comprehensive measure by determining the associated costs and fees of owning a property. To calculate net yield, deduct all these costs from the annual rental income and then divide by the property’s purchase price (or value).
For instance, if your annual rental income was £5,000 and your total annual costs were £1,500, the net rental yield would be 3%. This approach offers a clearer picture of the actual profitability of the investment after accounting for expenses.
Importance of rental yield
Rental yield is an indispensable metric for landlords as it facilitates comparing returns from different properties. A robust understanding of gross and net yields can guide you in selecting investments that align with your financial goals and risk tolerance.
Moreover, comprehending rental yield can also help set realistic rental prices, ensuring competitive positioning in the market while optimising returns.
Maximising rental yield
Several strategies can enhance rental yield. Renovating and upgrading your property can attract higher rents and more reliable tenants. Additionally, ensuring your property is well-maintained and in a desirable location can significantly impact rental income and yield.
Regularly reviewing rental prices and market trends can help you adjust your strategy and keep your property competitive, thereby maximising returns.
Top tips for boosting your rental yield
There are numerous strategies that landlords can employ to boost their rental yields.
Here are some of the most effective methods to enhance your returns on investment:
Reviewing your mortgage deal
It is crucial to ensure that you are on the right mortgage deal. Even a slight difference in the interest rate can significantly impact your bottom line, saving you money on monthly repayments and freeing up equity for further investments. Regularly reviewing your mortgage options can contribute to better financial outcomes.
Another effective way to improve your rental yields is to increase rent gradually over time. This method keeps your property competitively priced relative to other properties in the market while still achieving healthy rental growth.
Adding value to your property
Investing in improvements and upgrades to your property can also help to boost your rental yields. By adding value to your property, you can charge more rent and achieve a higher return on investment.
Here are some simple and cost-effective ways to add value to your property:
Decorating and redecorating: A fresh coat of paint can significantly improve a property’s appearance and is relatively inexpensive.
Upgrading fixtures and fittings: Replacing old and outdated fixtures and fittings can improve the property’s aesthetic appeal.
Adding storage: Additional storage space, such as built-in wardrobes or loft conversions, can attract tenants and help increase rental values.
Reviewing your insurance policy
Insurance is another cost that can eat into your rental income. It is vital to ensure that you are adequately covered against risks such as fire, theft, and tenant damage, but it is equally important not to overspend on unnecessary cover.
Review your current policy to ensure you are getting the best possible deal. Consider taking out landlord insurance, which can offer additional protection tailored to landlords’ needs.
Being efficient with your costs
As a landlord, you incur various costs, including maintenance and repair, marketing, and more. It is essential to be as efficient as possible with these costs to maximise your rental income.
For example, consider using a property management company rather than handling all repairs and maintenance yourself. This can save you time and money in the long run by leveraging professional services that could be more cost-effective.
Are you looking for a buy-to-let mortgage for your next acquisition?
By following these tips, you can boost your rental yields and achieve a higher return on investment from your buy-to-let property portfolio. If you require further information about funding your next buy-to-let or assistance enhancing your rental yields, please do not hesitate to contact our team today to discuss your options.
Please note: this is a long term investment which you hope will generate rental income along the way and a profit when you sell the property, but bear in mind that if you need access to some cash, a property can take time to sell or remortgage. If house prices fall, you might not be able to sell for as much as you had hoped. You would have to make up the difference if the property sold for less than you owe – a risk that increases, the higher the percentage you borrow. If you sell for a profit, you may have to pay capital gains tax. Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up. This would eat into, or even wipe out, your income and profit. It is recommended that you also maintain access to emergency funds to cover your mortgage payments during ‘void periods’ that may arise whilst you have no tenant and the property is not let. Please also note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
