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What is Rental Yield?

When buying a Buy To Let (BTL) property, investors will analyse its rental yield. Gross rental yield is simply the annual rental income of the property divided by the total purchase price. The purchase price used should include hidden costs like stamp duty (1% of the purchase price on residential property) and legal fees for conveyancing, which can run to thousands of Euro.

How Do You Calculate the Yield on a Rental Property?

Gross Versus Net Rental Yield

While gross yield is usually the figure used when speaking about rental yield, net yield is a more meaningful number. This is calculated by subtracting the costs associated with owning a Buy To Let (BTL) property from the rent and dividing that amount by the purchase price.

It is also important to realise that rental income is taxed like any other income; an earner in the higher tax bracket can expect to see over 50% of net rental income be paid over in tax. For these reasons, a typical buy to let investor putting down a 20% deposit will end up with a negative cash flow each month ie the after tax rental income will not cover the expenses associated with the investment. This situation will typically gradually ease over several years as rents slowly increase and mortgage payments stay constant. Once the mortgage is repaid, the investor owns the then debt-free building, which will have appreciated considerably over the lifetime of the investment. Many BTL investors see them as a form of pension in that they cost a little bit each month but in the long run, they produce a steady return.

Why Are Investors So Concerned With Rental Yield?

Buy to let investors view a property as no more than a steady stream of rental income. In a normally functioning property market, an investor can also expect a reasonable amount of capital appreciation in the value of the property. So the return is made up partially of rent and partially of capital appreciation; this is not dissimilar to an investor in shares having a return in dividends but also in share price appreciation.
The greater the rent, the more an investor will be willing to pay. Let’s suppose a landlord increases a tenant’s rent by €100/month or €1200 per annum. Applying a 6% yield to this €1200, the additional €100 per month of rent increases the value of the property by €20,000. An investor who manages to buy a property and subsequently increase the rent is effectively managing his/her yield upward.

What is a Good Rental Yield in Ireland?

At the time of writing, rental yields in prime locations are in the region of 6%. Rental yields in less sought after / properties can be as high as into double digits. So a “good rental yield” in Ireland at the moment is anything above 6%. There are a number of factors that feed into the yield that an investor will want from a property. For example, an investor will accept a far lower yield on a 2-bedroom apartment in the IFSC than (s)he will look for in a 5 bedroom bungalow in Donegal. The reason for this is that the apartment will likely have occupancy rates of 100% at all times and can expect strong capital appreciation over time. The large house in Donegal will not be as easy to rent and capital appreciation would not be expected to be as strong over the years.

A rental property in the highly sought after IFSC will command a high multiple of rent thereby giving investors a low yield.

Another factor that feeds into yields are interest rates. Low interest rates mean letting cash sit on deposit in a bank will generate a very weak return on investment. Accordingly, while a 5% yield might not look like a great investment on the face of it, if the return on offer from the bank is pretty much zero, then the 5% might start to look attractive by comparison. The inverse of this is that when interest rates are high, an investor will require a high yield for the trouble and risk of owning a property, when (s)he could just earn risk free interest from the bank.

Quickly Calculating a Property’s Approximate Value

While a property is ultimately worth what the highest bidder is willing to pay, a quick approximation of a property’s likely worth can be established if you know the annual rent. Simply divide the annual rent by the yield or multiply the rent by the inverse of the yield. It sounds more complicated than it is - the below table should be of use.

Note: Investing in property is a major financial commitment. The above is not offered as financial advice but merely as a general introduction to the concept of rental yield. Any investment decision should be made after careful due diligence and professional advice.

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