Basing your investment on rental yields

November 3, 2016

The property market continues to grow but why, when it comes to making investment decisions, does it all revolve around the price? This may seem like a strange suggestion given that almost all investments are made from a financial perspective. However, when it comes to rental yields, using them as a gauge can help determine whether a property is a good investment. Let’s look further into this.

A rental income that is stable

If you consider a property that is worth £100,000 and it offers a 5% return per year of £5,000 but if it increases in value to double that, yet the income remains the same at £5,000 then the yield as a percentage becomes 2.5%. This can be used to work out the correct price that could pay for a property that you are interested in.

The importance of rental yield

If you are looking for a yield of 10% and you believe that it can be achieved in the area that you are looking at then you need to consider the price of properties and the realistic rental income. An example of this would be a property worth £150,000 with a rental return of £10,00, this would equate to a yield of 6.66% and so would not fit in with what you want to achieve. Therefore, you would have to find a property that is a lower price but returns the same amount of income. This is exactly how the possible rental return can play a part in the amount that you want to pay for a property.

Consider other aspects

It is important to consider the reason why the property you are interested in may have dropped in price along with the rental demand in the chosen areas as well as your budget and finances. If the area has real potential and the type of property you are looking for is available while also offering the returns that you want, then this could have potential for a longer term investment.

There are other things to consider such as the increase in rent each year which should at a minimum, match the rate of inflation in order to ensure that your income continues to hold real value. A rental property also comes with costs and so these really do need to be considered.

What does it all mean?

It makes perfect sense to consider the rental yield of any property that you are considering purchasing if you have a plan to create a buy-to-let property investment portfolio in the long-term. This does not necessarily mean that you should purchase the property when your desired rental yield is available but it could be the right time to carry out further research to further enhance and inform the decision that you will make.

Mark Burns

Mark Burns is a Director and Property Investment Consultant at Hopwood House. With over 10 years' experience in property investment, Mark has provided investors with a wide range of opportunities in exotic locations around the world.

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