Quick Summary: What is Net Rental Yield?
You need to keep up to date with business terms as well as how they will affect your business in the buy-to-let industry. Rental Yield is the measure in which most, if not all, landlords use to determine a house’s profitability, and the difference between gross and net rental yield is invaluable knowledge.
The difference between ‘gross’ and ‘net’ in business
In general terms, ‘gross’ is used for the whole calculated total. ‘Net’ is used to describe the ‘real’ total, or the part that matters. Take a look at can of peas. The gross weight will be the total weight of the peas and the water. The net weight will be the weight of the peas once they have been drained of water, which is of course the part that matters. We can apply that to most business terms, especially rental yield.
Gross rental yield
The gross rental yield is the original calculation of your total rental income (the amount you get from rent per year) divided by the value of the house. This is then times by 100 to give you the percentage that is your gross rental yield.
House Price = £250,000
Rental income = (£1,800*12 months) £21,600
21,600 / 250,000 = 0.084, or 8.4%
Net rental yield
From that 8.4%, you need to find out how much of that actually matters to you. The house you let is going to need money spent on it during the year. These expenses can come from maintenance work, agency fees, advertising, mortgage repayments, refurbishing etc. Any extra money you put into the house is going to need to be deducted from your rental income to give you a real idea of how much cash income you are getting. You also need to take into account the times that your house is not being rented, as this will decrease your rental income.
So using the example above, let’s say that you had to spend £1,500 on refurbishing the living room and repairs to the oven and for 2 months your house was not rented. This would reduce your income by £3,600.
£21,600 - £3,600 - £1,500 = £16,500
16,500 / 250,000 = 0.066, or 6.6%
This is your net rental income.
If you want rental yield data for any area you are looking to buy in - an invaluable asset for your property search - you can head to our search engine page here
. After searching for a post code in the search bar, you will be presented with the average rental yield percentages for properties between 1 and 5 bedrooms in that area. You can then use this figure for your own calculations.