Calculating the best yield on rental property
Securing the highest possible yield on rental property is a key priority for buy-to-let investors. While strong capital growth prospects help to ensure that an investment pays off in the long term, rental yield is your regular source of income.
It provides an indication of the return you are making on your investment, by comparing rental income to the cost of the property on an annual basis. While there are different factors involved in making this calculation, the size of your rental yield is dependent on how much rent you are able to charge.
Consequently, before you commit to an investment it’s important to consider the various factors that influence how much tenants are willing to pay to rent your property.
There is a reason why ‘location, location, location’ has become a guiding mantra for property buyers. Whether it’s a buy-to-let project or a regular residential purchase, the location of the property is a fundamental part of the buyer’s decision to invest in it.
One scenario in which this becomes particularly significant is when investors are looking for housing that will appeal to commuters. In the London commuter belt, for example, property owners can charge higher rents to people who earn London wages but would prefer to live within travelling distance of the capital, rather than in the centre.
A prime example of a town that meets the criteria of investors and commuters alike is Luton in Bedfordshire, which estate agent Jackson-Stops recently named the top living destination for people travelling into London for work.
Regional rental statistics from the Deposit Protection Service provide an insight into the sort of yields available in commuter hotspots like Luton. Typical rents in Greater London (£1,307), the south-east (£879) and East Anglia (£803) are higher than the UK-wide average of £772.
The ongoing demand for housing in popular commuter towns also provides a good chance of strong capital growth for property investors.
Of course, it’s not only commuters who attach a lot of importance to the location of their home. Students will be looking for easy access to their university or college and certain lifestyle benefits in their area, while families will be prepared to pay higher rents in locations that are known for their safety and good schools.
Simply put, renters are willing to pay more for properties that provide the facilities to make their lives easier, safer or more enjoyable. Consequently, investing in these sorts of assets gives you the best prospects for gaining the highest possible rental yield.
Taking the student market as an example, renters will be prepared to pay a premium for housing that meets their specific needs. Developments such as Liverpool’s Baltic 56 from Experience Invest – which offers high-speed Wi-Fi, spacious studio apartments and access to a games room and a gym – provide strong rental yield prospects for investors because they have so much to offer the target market.
Similarly, the recently launched Imperial Square in Luton is well-suited to the commuter segment. People who have busy working lives in the capital will attach a lot of value to this property’s central location, convenient transport links and leisure amenities including a club lounge and cinema room.
By meeting the specific requirements of your target market and staying in tune with what renters want and need, you can maximise your rental income over the long term.
Which asset class?
The potential for high rental yields thanks to strong demand from tenants is one of the key reasons why certain asset classes prove particularly popular among investors.
Student accommodation is a perfect example of this. Widely recognised as the UK’s best performing asset class, student accommodation offers high average occupancy levels and a low risk of void periods – times when the property is empty and the owner is missing out on rental income.
This is largely driven by renter demand. The UK’s higher education institutions remain a powerful draw for students both within these borders and overseas, as emphasised by the latest data from UCAS. Figures for 2018 have shown record highs in undergraduate applications from English 18-year-olds, as well as applicants from non-EU foreign countries.
As far as the property market is concerned, there is a lack of purpose-built accommodation for this demographic. The resultant high demand for desirable student property in locations offering a combination of lifestyle benefits and easy access to colleges and universities means strong rental income prospects for owners.
Residential housing is another asset class with good potential for rental yield. With undersupply an ongoing problem for the UK property market as a whole and many people struggling to muster the financial resources to buy a home, renting is an increasingly popular choice. Much like in the student sector, residential tenants are willing to pay for a rental property that meets their needs.
Buyers looking for the most reliable way to secure a strong rental yield from their chosen property can benefit from choosing an investment with certain assurances built in.
Experience Invest provides this advantage with a number of its current investment opportunities, such as Imperial Square in Luton, which offers six per cent net rental returns per year, assured for two years.
In Liverpool, a city that is steadily growing in prominence as a tourism destination and a hub for business start-ups, investors can receive definite returns and good capital growth potential.
Current investment opportunities in the city offer rental returns of at least 6.5 per cent for three years at the Infinity Waters residential development, eight per cent for five years at Aura Student Liverpool, and ten per cent for ten years at the EPIC Hotel and Residence.
With these sorts of assurances on properties that deliver the features tenants want in a prime location, investors can put themselves in the strongest possible position to secure consistently high yields on rental property.