Ready to become a landlord and want the biggest return on your investment?
It’s worth getting to grips with rental yield if you’re purchasing a buy-to-let property.
Gross rental yield is the amount of money you make from a rental property each year, after you take away the cost of buying it. Net rental yield also factors in the cost of maintaining the rental property.
Both are usually expressed as a percentage and can help you decide if a property is a good investment.
But it’s not just yield that you need to think about with a buy-to-let property. A high-yielding market might not deliver much house price growth or tenant demand, which can be a key consideration as to whether you’ll get a return down the line.
The highest-yielding rental regions in the UK
Our Rental Market Report for September 2023 shows that the average rental yield in the UK is currently 5.03%, as the average buy-to-let property costs £263,000 and the average rental rate is £1,163.
Yields are running higher than this time last year, when the average gross yield was 4.8%. The average investment property cost the same but average rents were lower at £1,053.
The region with the highest rental yields is currently the North East, where the average gross yield is 7.2%.
Locations with cheaper house prices tend to offer the greatest yields, even though rent is also usually cheaper.
The average buy-to-let property costs only £109,000 in the North East, so an average rent of £649 offers a greater return in comparison to the cost of the property.
On the other hand, London has the lowest gross yield in the UK as it’s so expensive to buy a rental property there - despite average rents reaching £2,053 this month. However, this is higher than the average gross yield in London this time last year of 4.16%.
|Region||Average gross yield||Average monthly rent||Average price of a buy-to-let property|
|Yorkshire and the Humber||6.1%||£758||£150,000|
|East of England||5.0%||£1,111||£266,500|
The 10 highest yielding rental cities in the UK
When it comes to cities, you’re generally better off focusing your search in the North of England if you’re after a high yield.
In Sunderland, the average rental property costs a little over £80,000, meaning a high 8.39% gross yield with a £582 rental rate.
Discover more about living in Dundee
|City||Average gross yield||Average monthly rent||Average price of a buy-to-let property|
The highest yielding areas in each region of the UK
Looking for a buy-to-let property near where you live? It can be useful as you know the local area and can work closely with a local letting agent.
So you might want to consider which parts of your region offer the greatest rental yield. Here are the top 3 local authorities for yields in each UK region.
Nottingham - 6.8% gross rental yield
Boston - 6.34% gross rental yield
Mansfield - 6.36% gross rental yield
East of England
Great Yarmouth - 5.93% gross rental yield
Peterborough - 5.93% gross rental yield
Fenland - 5.92% gross rental yield
Barking and Dagenham - 5.81% gross rental yield
Newham - 5.56% gross rental yield
Bexley - 5.38% gross rental yield
Sunderland - 8.39% gross rental yield
Middlesbrough - 8.16% gross rental yield
Hartlepool - 8.01% gross rental yield
Burnley - 8.11% gross rental yield
Barrow-in-Furness - 7.43% gross rental yield
Liverpool - 7.32% gross rental yield
West Dunbartonshire - 9.05% gross rental yield
Renfrewshire - 8.96% gross rental yield
East Ayrshire - 8.58% gross rental yield
Southampton - 6.16% gross rental yield
Portsmouth - 6.05% gross rental yield
Gosport - 5.93% gross rental yield
Gloucester - 6.01% gross rental yield
Plymouth - 5.98% gross rental yield
Swindon - 5.80% gross rental yield
Blaenau Gwent - 7.25% gross rental yield
Merthyr Tydfil - 6.94% gross rental yield
Neath Port Talbot - 6.89% gross rental yield
Stoke-on-Trent - 6.90% gross rental yield
Coventry - 6.28% gross rental yield
Newcastle-under-Lyme - 6.22% gross rental yield
Yorkshire and the Humber
Hull - 7.03% gross rental yield
North East Lincolnshire - 6.92% gross rental yield
Bradford - 6.86% gross rental yield
What is rental yield?
Rental yield is the amount of money you make from a rental property each year against the cost of purchasing and running it. It’s always expressed as a percentage.
The gross yield only takes the cost of the property and the rental income into account.
The net rental yield, on the other hand, considers the extra costs of running the property, like maintenance and property management.
To figure out the best investment property for you, it’s worth looking at both of these yields as well as other factors.
Why is rental yield important?
Before you jump into buying a property to rent out, you've got to figure out if it’s a worthwhile venture.
If your rental income doesn't cover your costs, or you're just breaking even, unexpected expenses like fixing a broken boiler or a leaky roof can impact your finances.
So looking at the potential rental yield will help you do the maths and make sure it’s a good investment.
What else to think about with a buy-to-let property
There’s more to choosing a good buy-to-let property than just the rental yield.
You could buy a property with a strong yield, but if house prices aren’t rising or you can’t find tenants, it might not be the best investment.
House price trends
Get a feel for house price growth to see if the property is likely to rise in value. Look at historic sale prices for individual properties as well as value increases for the postcode and local area.
The cost of a buy-to-let mortgage
At the same time, you need to think about the costs of taking out a buy-to-let mortgage and all the other associated costs of running a rental property.
It also helps to understand what tenant demand is like in the area and what sort of properties they’re looking for.
Speak to a letting agent to find out what’s happening in the local rental market. They’ll be able to share what tenants are looking for and which properties could be a strong buy-to-let investment.
How to work out your gross rental yield
Let’s say you want to buy a property worth £200,000. You plan to charge £1,000 per month in rent, which works out to £12,000 per year. Divide 12,000 by 200,000, then multiply by 100. That equals a gross yield of 6%.
(Annual rent / property value) x 100 = gross rental yield
How to work out your net rental yield
To work out your net rental yield, you need to take your extra costs off your annual rental income.
So add up the amount of money you think you’ll spend over the year. This will include paying the mortgage, agency fees, property maintenance, and any costs you might incur to keep up with regulations.
Then deduct these costs from your annual rental income, and do the same sum from there.
[(Annual rent - annual costs) / property value] x 100 = net rental yield
Let’s say you’re buying the same £200,000 property and charging the same £12,000 per year in rent.
But you’re spending £300 on maintenance and agency fees, which comes to £3,600 over the year.
That means your net rental yield for this property is 4.2%.