What would you say is the most important aspect of a good property investment? The location? The number of bedrooms? Unsurprisingly, one consideration property investors take most seriously is the earning potential of the property.
Usually, that means the potential capital growth of the property, but that is not the only financial factor that plays a fundamental role in deciding whether an investment is good or bad. Rental yield is just as important.
Why? Because property investment is a long-term process, and you don’t want to leave any of your properties empty. You want long-term, paying tenants and that means you can’t ignore rental yield.
In this post, we’re going to demonstrate why rental yield is so important and how you can find the highest UK rental yields for your property investment.
How Important is Finding a Good Rental Yield?
Rental yield is calculated by dividing your annual rental income by the total value of the property. In that way, rental yield is the clearest return on investment you’ll see each month.
Here’s an example:
Based on a property that costs £300,000 to purchase, with an annual rental income of £24,000 (£2,000/cpm).
300,000 ÷ 24,000 = 0.08 so the rental yield is 8%.
Considering the current state of the property market, a good rental yield for a buy to let property in the UK would be around 7% or more.
Making sure that the property pays for itself month-after-month is far more important than securing a theoretical profit when you sell. When property investors focus too much on other factors like capital growth, they risk running into trouble if the housing market does not go the way they expect.
This isn't suggesting that capital growth should be ignored, but if you find a property with a high rental yield, it's a solid indication that the area is in demand or up and coming. As such, a good rental yield is often an indication that you can expect decent capital growth.
“There are areas of Manchester where you can see rental yields of over 10% for single let properties. Does this fact make these properties fantastic investment opportunities? Sadly, no. These houses are £40k terraces that have little chance of growing in value and where the tenants are unreliable and difficult to deal with. Also, properties like this are difficult to sell and with any investment, an exit strategy is an essential thing to plan.”
So, it’s clear that rental yield is an important factor in selecting a property investment. The question is, how do you identify a good rental yield?
1. Don’t Make Any Assumptions
When you first start your hunt for a high rental yield property to invest in, it’s important to not make any assumptions about the area or type of property you should invest in.
If you make your decision based on newspaper headlines, you could find yourself making a long and expensive trip to London.
You don’t need to do this though, while the south-east has traditionally been viewed as the place to invest, the north should not be ignored.
Manchester is currently flying the flag for the north-west, having been identified as the best buy-to-let area in the UK but it’s not just Manchester you should look out for. Chorley, Preston, Warrington and Wigan all have strong rental markets and opportunities for high rental yield investments and relatively low purchase prices.
2. Look for a High Occupancy Rate
When looking for a property that will give you a great rental yield and return on investment, an area’s occupancy rate is a good place to start.
Properties with high occupancy rates, by definition, have high rental demand and, therefore, are more likely to possess a higher rental yield.
In order to find an area with high occupancy rates, you’ll want to consider economic factors such as job growth, investment in city and town centres, restaurants & pubs, as well as social factors such as the quality of schools and low crime rates.
Even if you’ve already identified a high rental yield property, it’s still worth taking some time to research the area in relation to occupancy. If you don’t, you may find yourself with a property that you can’t fill, and it doesn’t matter how high the rental yield is if there’s no one to pay it.
A high yield without a high occupancy rate is like a canoe without an oar – going nowhere. Your investment might look great on paper but, if you can’t actually fill it, you will be left with an empty building.
Find a property with a good occupancy rate and a high rental yield and you could be onto a winner.
3. Look for Great Transport Links
The days when people went to work a stone's throw from where they lived are gone. Now commuting is an accepted part of life, and so great transport links are a fundamental part of choosing a property to invest in. By seeking out a town with great links to major cities like Manchester or Liverpool you give yourself the best chance of discovering a brilliant investment opportunity.
Typically, you’ll find these transport links in what would traditionally be called a commuter town. As city centre prices rise though, and more and more people move to these areas, increased investment is being made and driving demand for rental properties in towns like Chorley and smaller cities like Preston.
This is especially true for young professionals who are yet to get on the property ladder. This growing demographic is looking to reside in towns within a commute to the city in which they work. This offers a great opportunity for investors to get involved with the booming market of young professionals flooding to these areas.
So, when looking for a property to invest in, ensure it has good transport links nearby. No one likes to be left isolated.
4. Invest in Towns, Not Just Cities
Towns like Chorley may not have the glamour of a Manchester or a London, but that does not mean they can’t provide you with a rental yield that is as good (or even better).
As we alluded to in our previous point, more and more of the rental market is being priced out of city centre opportunities, resulting in towns being in pole position to benefit from increased demand.
It’s also worth mentioning at this point that towns provide a much lower entry point for investors who don’t have the funds required to buy in a city centre.
Finding a property in an upcoming town will afford you a high yield at a lower price. Of course, you can find great investments in the big city that come with high rental yields but, if you want to find a balance between avoiding high property prices and a property in a growing area with rising rental yields, look for opportunities in towns and smaller cities.
With this increase in city centre prices, you might be worried that choosing a regional town means missing out on an opportunity. Don’t forget though, if you’ve chosen an area with good transport links, this becomes less of a problem.
5. Turn to University Hotspots
Even better than choosing to invest in a town over a big city, is choosing to invest in a regional student city or town. Preston is a good example. The city and surrounding areas possess three universities, UCLan, Lancaster University and Edge Hill.
A major point on the agenda for all universities is increasing their graduate retention rates. That means more young professionals staying in the area to work after university. We can see that 22% of graduates are staying in the Preston area for work. which boosts the region’s occupancy rate and housing demand. All this means higher rental yields.
Even better for property investors, more and more young professionals are renting instead of buying. In 2016, home ownership for 25 to 34-year-olds earning between £22,200 and £30,600 per year fell to 27%. When you compare this to 20 years ago when that number stood at 65%, you begin to see how important the graduate and young professional market is for driving high rental yields.
So, choosing a university town or a small city is a great way of identifying high rental yields and benefiting from high-quality tenants.
Graduates are more likely to be earning higher salaries and with developers taking advantage of this surge and offering more luxury housing for professionals, student towns provide a wealth of opportunities for property investors.
6. Find an Assured Rental Yield
By following the above points, you’ll be putting yourself in a great position to invest in a high rental yield area.
As with any type of investment though, there are no guarantees, and that’s why you always want to look for opportunities to secure your rental income. The best way to do this is by investing in a property with an assured rental yield.
Assured rental yields are exactly what they sound like. They guarantee you rental income for a certain period of time (usually the first year).
That means if you struggle to fill your new investment straight away, you won’t be left out of pocket. You’ll still receive your monthly rental yield.
This lowers the immediate risk of investing in property and makes it easier for new investors to get involved with property.
This is great for those looking to get involved with their first property investment but might be concerned about having to find tenants quickly in order to start seeing a return.
Now you know what to look for in a property and how rental yield relates to a good investment. For your next property investment, make sure you research multiple areas thoroughly and look for areas with high occupancy rates, as well as considering rural towns that have good transport links to major cities.
If you do all that, we’re sure you’ll find an amazing investment opportunity - one that offers you great financial returns.
Remember, rental yields are important but a high rental yield doesn’t always equate to a great investment. There are other factors that make an investment worth considering and you shouldn’t base your investment solely on the property’s rental yield.
For more information on finding a great investment, download our FREE eBook, How to Invest in Property the Easy Way: Strategies for Success and What to Avoid.