Whether you’re looking at investing in buy-to-let housing for the first time or want to identify high-growth hotspots in the UK to expand your property portfolio, targeting areas that offer high-yield potential can help you maximise your investment.
In this guide, we will help you understand what rental yield is, how to calculate it, and how to use this to help identify where to invest your money, finding areas that balance rental demand with quality tenants.
What is rental yield?
Rental yield is the amount of potential rent you could receive from an investment rental property per year, expressed as a percentage. There are gross and net rental yields, and understanding both can help you identify properties with the potential to be high-yielding.
Gross rental yield focuses on the price you bought the property for and how much rent you could earn on it. It is calculated by (annual rental income/property price) x 100
Net rental yield also takes into account the associated costs of owning a buy-to-let property, such as insurance, maintenance and property management. It is calculated by ([annual rental income-annual running costs] / property price) x 100
For example, let’s say you paid £200,000 for a property. You could charge £1,200 per month or £14,400 annually, and you would spend around £6,000 on fees, insurance, and maintenance per year. Your gross rental yield would be 7.2%, and your net rental yield would be 4.2%. The higher this percentage is, the higher the yield on your rental property.
Generally, a good rental yield is anything above 5%.
Tapping into the student rental market
Cities with a large student population provide opportunities for high-yield investment houses. With constant streams of new students, your property is unlikely to be vacant.
It’s important to understand current guidance, especially if you’re investing in a House of Multiple Occupation (HMO), to ensure that your property is in line with policies. Altering your investment property may require further investment, so you will need to factor this into your net rental yield.
A rental property in a student city presents the opportunity for long-term growth, as you can regularly review rental prices. Tenancies tend to be shorter if you’re renting to students, often one year, which allows you to monitor rental prices in the area and more easily adjust your pricing between tenants.
Some students also decide to stay on in their university towns after graduating, while they first enter the job market, meaning you could look to attract young professionals as well for your tenants.
Whether you’re renting to students or young professionals, investing in property in cities and towns that have high-quality education institutions is a great option for a high-yield rental property.
Areas with ambitious, career driven people
Another way to identify high-yield opportunities is to look at where employment rates are high. This suggests strong economic growth, as well as a pool of high-quality potential tenants and a healthy demand for rental properties.
Avoid areas with high unemployment. Instead, look for areas that have thriving industries or are home to big employers. While these areas tend to be cities, such as Manchester or London, there are many up-and-coming areas that are experiencing employment booms driven by tech and finance industries, such as Reading or Winchester.
Unlike a property in a student town, targeting professionals offers a different type of tenant. They’ll likely be looking for longer rental agreements, which can benefit you as an investor, as you can rely on stable rent collection and reduced costs to market and find new tenants with minimised turnover. However, your ability to increase rent is more limited with long-term tenants.
You can use property market data to research local rental yields in your desired location, and it’s worth looking at average household income to help you identify areas of interest, focusing on high yields from high earners.
Rental properties in areas of regeneration and redevelopment
Look out for areas undergoing large-scale regeneration or with redevelopment plans in place. This strongly suggests that the area’s desirability will soon increase, along with property values and demand.
Investing in buy-to-let properties in these areas early will likely improve your yield potential, especially if you purchase before house prices rise in line with demand and desirability.
Areas that have undergone redevelopment are also likely to be a safe, secure long-term investment, as they’ll have undergone lots of environmental research, making them likely to be less at risk of environmental problems like flooding
Investing in these areas may also come with incentives to create eco-friendly estates, allowing you to install sustainable features on your rental property, such as solar panels or insulation, in a cost-effective way with the help of grants. Not only can this future-proof your investment, but it can also attract high-quality tenants who care about their carbon footprint, too.
Final thoughts
When it comes to finding high-yield rental properties in the UK, there are several approaches you can take, from short-term student rentals to targeting long-term professionals in areas with thriving employment opportunities.
Using property data and researching areas with the greatest potential can help you make data-driven decisions that result in long-term growth for your buy-to-let houses.
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