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How to Calculate Rental Yield

Wednesday, 26th March, 2014

To calculate gross rental yield landlords divide their annual income by the value of the property. For example, a 120,000 property that generates 12,000 has a gross yield of 10%. If the property doubles in value over ten years and the rent goes up to 24,000 a year, the gross yield is still 10% but it is worth remembering that the yield based on original purchase price is actually 24,000 divided by 120,000 which is 20%.

To calculate net rental yield landlords combine all of their income and then subtract all outgoings - including tax, mortgage repayments, maintenance, service charges, tenancy deposit protection charges and insurance - from their income. The yield is the figure as a percentage of the value of the property. For example, if you own a property worth 100,000 and after adding together all the rental payments and subtracting the outgoings, you have 6,000. The rental yield is 6%.

What Is Capital Appreciation?
Capital appreciation is the difference between the value of the property when it was bought and the value of it now/when sold. In the current market, many landlords will be in negative equity (lack of capital appreciation). They would therefore make a capital loss on their property if they were to sell. Landlords are required to pay Capital Gains Tax at a rate of either 18% or 28% (depending on their income) on the capital appreciation when the sell the property. Capital expenditure that has been spent during ownership (as against those claimed as repairs) is added to the purchase price before calculating the gain.

The NLA has been campaigning for landlords to be treated as small businesses in this respect and thus allowed to benefit from roll-over relief in the same way that other businesses are able to.

How To Calculate Overall Return On Investment
Return on investment (ROI) is effectively profit. It is the amount of money you have made on the property. To calculate ROI, landlords combine their capital appreciation with net rental yield and deduct capital gains tax. This will produce ROI. However, landlords can only truly calculate ROI when they sell the property.


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