Understanding rental yield and capital growth for Landlords
Rental yield is the term used to describe the return on a property investment from a rental perspective.
If the monthly rent is £2,000 and the property is occupied for a full year, you will receive £24,000 per annum. If this sum is greater than the cost of owning, managing and maintaining the property, then you will make a profit that will be subject to income tax.
When investors compare rental properties, they will calculate the rental yields to see which is the most lucrative. To do this, they will divide annual rent by the value of the property, and then multiply the result by 100 to get a percentage return on investment.
In this example calculation, the costs of managing a rental property have been ignored, as these will differ depending on the size of the mortgage, the condition of the property and whether a letting agent is used. If the property in the above example cost £500,000 to buy, the following calculation would be used to determine the rental yield, which in this example is 4.8%:
24,000 / 500,000 = 0.048
0.048 x 100 = 4.8
If the property is more expensive to buy, but the rent is the same, the return on investment would be lower. Conversely, if the property were cheaper to buy, but the rent was the same, the return would be greater.
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