1) Calculate your total property costs
Add up the property purchase price, SDLT (if applicable), renovation costs, legal fees, and any other property fees you may have relating to the purchase/preparation of the property in readiness to 'let'.
2) Calculate the gross rental yield
Thorough research of rental values (for comparable properties) in the area that you have, or intend to purchase, is vital (if you are using property 'portals' to calculate projected rental figures, be cautious! The 'asking' rental values may not be indicative of what was actually achieved by the agent/Landlord). Calculate the amount of annual rent collected and divide it by the total cost of the property. Multiply by 100 to get the percentage of gross rental yield.
3) Calculate the net rental yield
The net rental yield will help you determine whether or not the property is a wise investment. If your calculations show that you are paying too much for the property (or not achieving a good return), you can re-evaluate your investment, and negotiate for a lower price!
Calculate the annual property expenses by adding up a year's worth of repair costs, property taxes, landlord insurance and agency fees.
To calculate the net rental yield, subtract annual expenses from annual rent and divide this figure by the total cost of the property. The result should be multiplied by 100 for the net rental-yield percentage.
N.B. It is important to note that achievable 'net yield' figures will vary from area to area, although in our experience in the South-East of the UK- If you should be aiming to achieve a net yield in the range of 4.0% to 5.0%- This would be a 'solid' return, and a good investment!