Understanding rental yield and capital growth

If you are thinking of investing in property you are probably looking for one of two things: a regular income (rental yield) or for the value of the property you buy to increase over a period of time (capital growth). Over time there may even be a combination of both.

What is rental yield?

Quite simply, rental yield is the return you are making, or expect to make, on a property you own or are thinking about purchasing.

Property investors and landlords use rental yield as a means to monitor the value of their property investments and portfolios.

How do you calculate rental yield?

To calculate rental yield you will need to know the purchase price of the property, or a current market value, and the annual rental income that you expect to receive.

Take the annual rental income amount and divide it by the property value/purchase price. To convert this figure to a percentage, you simply then need to multiply this by 100. This percentage is your rental yield.

For example, for a new property purchase it might look like this……

Annual rental income: £6,000
Purchase price: £100,000
= 6% yield

Remember, you are taking the annual rental income, dividing it by the property’s purchase price or value, then multiplying by 100 to get your percentage.

What is the difference between gross and net yields?

A gross yield is when you take rental income as a percentage of the property value, as in the example above.

With a net yield, you also need to take into account any other costs you may have such as insurance, mortgage payments or maintenance.

Regional differences

Property prices and average rents are different for each town, city and region meaning that yields will vary across the UK.

This means that the yield for a property in Norwich will most likely not be the same as the yield for a property in Durham, so it’s important you factor this in when doing any calculations.

If you’re keen to keep an eye on property prices, check out our monthly House Price Index report which monitors property asking prices in England and Wales. We also publish a quarterly Rental Trends Tracker which monitors property rental prices around the UK.

Capital Growth

Capital growth, also known as capital appreciation, is the amount your property or portfolio of properties increases, or decreases, in value over time.

For example,

Purchase price £100,000
Current value £125,000
Capital growth £25,000

There are many factors that can affect property prices in a given area on top of general market supply and demand for housing. If there are plans for regeneration, new infrastructure, transport links or investment in an area this can have a positive effect on future prices.