Are you a new landlord to student tenants and want to calculate what you should charge in rent for a prospective new property? Or maybe you’re profitable but not quite sure how to work out what your margin is if you buy a new student let property? Never fear, because in this brief and simple guide, we have the answers.
How to Work Out Rental Yield
It’s a simple process to work out your yield:
- First, work out what you earn in rent over a year. You can do this by multiplying monthly rent by 12
- Divide the income by what you pay for the property (yearly cost, not full mortgage value)
- Multiply this figure by 100. This gives you the yield percentage
The higher the number, the better. Anything above 5 is exceptional, but most fall between 3 and 5 percent.
There are two different types of yield. This is how you work out the gross yield. There is another type – Net Yield.
What is Net Yield? How Do We Work It Out?
What you calculated above was gross yield – your income over and above what you pay for the property. But that is not the complete story. Other factors impact your bottom-line profit. For this, you need to make a deduction from the rental income and then use the formula to work out your yield.
Every year, you will need to spend money on things like repairs and services, redecorating (between tenants), and other improvements. Some are essential, some are aesthetic and help you sell the property to prospective new tenants.
Net yield, then, is annual income – maintenance & upgrades expenses for that year / price of property for that year multiplied by 100. This will naturally be lower than your gross yield.
Should You Put the Rent Up if Your Yield is Low?
That’s a difficult question to answer because many things impact the yield. If a seasoned landlord, it may be that you’ve had an expensive year in terms of repairs and servicing. This will affect your net yield, but it will (hopefully) only impact it for that one year. Your reaction to a low yield year should not be to put the rent up.
For new landlords, there are other factors that might impact this. Initial investments are expensive, and your rent might be right for the area; the state of the market and how much you paid for the property compared to what others paid are all important factors. If it is your first property, your yield may not see significant returns for several years. Like any business, buying student rental is an investment. No business decision should be motivated purely by first year returns, but a wider projection of profitability.