Newcomers to the property market are faced with a number of financial concepts to digest. Anyone considering entering the world of rental investment as a landlord will need to decide pretty quickly whether what they are primarily looking for is rental yield or capital growth – and whether they’re able to achieve both. But what are they?
Simply put, rental yield refers to the amount of money brought in by letting a property; it’s the monthly profit made on the initial investment, while capital growth is the property’s long-term increase in value.
Gross rental yield is simply the annual rental income divided by the total cost of the property, multiplied by 100. For example, a property bought for £200,000 and generating an annual rent of £15,000 will deliver a gross rental yield of 7.5% (15,000 ÷ 200,000 x 100). To calculate the approximate net rental yield – and work out how much actual profit you’ll make – you need to take away total expenses from the annual rental income, and divide this result by the total cost of the property. Multiply the result by 100 for the net rental yield percentage. So in the above example, annual expenses of £1,600 for repairs, taxes, insurance and fees would bring the net rental yield to 6.7% (15,000 - 1,600 ÷ 200,000 x 100).
Capital growth, on the other hand, is a longer game. This your property’s increase (assuming it is an increase) in value over time. If you buy a property at £250,000 and sell it five years later for £500,000 then you’re looking at £250,000 in capital growth.
Markets are different all over the country, and yield for properties in London is likely to be different from properties in, say, Dorset. As a rule, current yields in London are lower than in much of the rest of the country. Aaron Priscott of Winkworth in Queens Park, Kensal Rise and Willesden Green says: “Yield investments are extremely difficult to find for the average purchaser in London due to high house prices, taxation on landlords and the introduction of landlord licensing. Apart from the most savvy professional investors, the general public will be looking at net yields of 3-5% on a good day, so really it’s only about a holding pattern for long-term capital growth for most. Professional investors will need to be thinking outside the box to get towards the 8-10% yields they would have been looking for historically.”
It’s often the case that properties offering higher rental yields will deliver smaller capital growth. Smaller properties at the bottom end of the market can sometimes offer good yields, and thus a good monthly income, while their long-term capital growth is less impressive. On the other hand, properties with potential for huge capital growth might not offer much by way of rental yield in the short term. As with any investment, there are multiple factors to consider when thinking about buy-to-let, and anyone looking to embark on a rental investment will in the first place need to decide what’s most important to them.
If you're a seasoned landlord or looking to enter the buy-to-let market for the first time, we’re here to help. Our local Winkworth offices can offer plenty of advice and expertise on the current market and help you along your way to becoming a rental investor. We can help you find properties in the right area, at the right price and make your investment work from day one.