There are two commonly-used calculations to determine annual rental yield: Gross and Net. Gross rental yield tends to be used by lenders and those looking for a fast rule-of-thumb; net rental yield is more useful for investors. For both calculations you will first need to work out the property value and your annual rental income.
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Determine the property value. You can use either the purchase price or the current market value. For example, if the property is valued at £300,000, use that value for the calculation.
Calculate annual rental income by simply multiplying the monthly rent by 12. For example, if the monthly rent is £1,500, the annual rental income would be £18,000.
Divide the annual rental income by the property value and multiply the quotient by 100 to get a percentage. For example, if the annual rental income is £18,000 and the property value is £300,000, the annual rental yield would be 6%.
Sum up the annual expenses. These typically include:
An important note on property value: if you purchased a property with a mortgage substituting your current equity for the property value will give you a more useful figure.
Subtract the annual costs from the annual rental income. Now divide the difference by the property value. Now take the quotient and multiply it by 100. This will give you the annual rental yield as a percentage.
Now all of that is rather a lot to remember, which is why we created a tool that calculates rental yield for you.