Whether you are a first time investor or an experienced landlord with a large portfolio, it is always worth returning to the basics when purchasing your next property – and nothing is more important to focus on than achieving a good rental yield.
If finding the best rental yield isn’t at the forefront of your considerations then you are limiting your potential returns from day one. To help you make the most of your investment and achieve a high return on your properties, we have put together a short guide on what you should consider when thinking about rental yields and where you can find the best ones.
How to find the highest rental yields?
When we talk about “rental yield”, we mean the percentage return on your property that you receive in the form of rental incomes. Take the monthly rent and work it out as a percentage of the initial purchase price and you have your rental yield percentage.
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This is a separate income stream from capital appreciation – the amount by which your property rises in value over the years – but both are linked by similar factors. For example, it is likely that an area with high rental yields will also be one where house prices are increasing rapidly. Similarly, increasing populations and growing economies also contribute to this by driving up demand for rental accommodation.
However, the major difference is that your rental yield is what will make up the regular, reliable income stream which allows you to plan your portfolio and future effectively. This makes it extremely important and is the main reason why the vast majority of investors hold high rental income to be the most important factor in their purchasing decisions.
There are two main ways that rental yields are normally expressed:
- Gross yields – This means everything before your expenses which can include legal fees, mortgage payments, management costs etc. This will be a larger number than the NET yield.
- NET yields – This is the rental yield percentage left over once all expenses have been accounted for. It is generally favoured as a measure as it is more accurate than the Gross figure and can be used to more effectively plan a property portfolio.
Another factor to consider is whether you would prefer to purchase a property with an assured yield – this means that you will receive a set amount over a period of time, which in some cases can reduce risk. For example, a property may be offered with an assured yield of 7% a year for five years, which sounds high at first glance. In reality, they are normally offered in areas where the rental market is anticipated to grow faster than the assured yield – for example the average local rental yield may grow to 8% a year. In this instance, you would still only receive 7% and miss out on the full return generated by your property.
For this reason, we would not recommend an assured yield. The added security of a time-limited guarantee may appeal, but if you do your research thoroughly and effectively then you should be able to account for the level of risk that assured yields protect against, thereby eliminating their main benefit.
Where to find the highest rental yields?
So, now we have established how to work out what the highest yields are and discussed why getting them is important, the question becomes: Where can you find the highest rental yields? Different areas of the UK differ wildly so it is vital to do your research beforehand.
Above all else, look for places where the population is growing, where entry prices are affordable, where there is an existing shortage of supply and where there is a significant amount of building and infrastructure work underway or in the pipeline.
In all of these ways, the North of England is the place to be. More specifically, city centre luxury apartments in Northern cities like Manchester and Preston are the UK’s number one property investment growth market.
For example, the growth in house prices across the North – even during the challenges presented by Covid 19 – backs this up, confirming the region’s ongoing strength despite the adversity. As per our recent article about the national house price forecast showing big gains in the North West:
“Over the last 12 months, the UK House Price Index (powered by Dataloft) shows that property values in the North West showed the strongest year-on-year growth of anywhere in Britain, matched only by the East Midlands and Yorkshire.
“On average, house prices in the UK grew by 5.4% over the year to October 2020, but in the North West that figure reached a high of 6.6% over the same time period.
“Many areas which are traditionally popular with homebuyers and buy to let property investors did not achieve anything close to gains that high – London (3.9%), the South East (4.7%) and the East of England (3.4%) all fell far short, and it is likely that investors in particular will continue looking towards cities like Manchester which are leading the way in the country’s best performing regions.”
Cities like Manchester and Preston are equally strong when it comes to population increases, future rental prospects, infrastructure investment and ongoing economic growth. When looking for the best rental yields, these are the places to be.
Read more about the best buy to let investment areas in 2021 >>
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