There are two primary reasons why landlords get into the buy-to-let game: to earn income in the short term from the monthly rent and to see their investment appreciate in the long term. These two aspects are referred to as yields and capital growth, and it’s handy to know a thing or two about them if you’re a landlord.
What is a yield? What is capital growth? Those are the questions we’re answering in this guide. So read on and learn everything you need to know about yields and capital growth and how they can benefit your buy-to-let investment.
What is a yield?
A rental yield is the rate of return from your buy-to-let investment – how much you earn in rental income when compared to the purchase price. When an investment property is listed for sale, many agents include the expected gross rental yield, which gives you an indication of what you can expect from a financial perspective.
How to calculate a yield
The easiest way to work out a yield is by calculating your yearly rental income and dividing it by the cost of the property, then multiply it by 100. This will give you your yield. For example, £15,000 per year in rental income divided by £300,000 purchase price multiplied by 100 equals a yield of 5%.
What is a good yield?
A good yield is generally anything of 5% or over. However, there are other factors to take into account (such as capital growth) that doesn’t always mean higher yields equate to a better investment. As a general rule of thumb, though, there's certainly no need to complain if you’re getting yields of 5% or more.
What is capital growth?
Unlike yields, which are more of a short-term focus, capital growth looks at the amount your property increases by over time. It’s the profit that you make on your investment. Eg, if you bought a buy-to-let property for £300,000 and sold it for £500,000 six years later, it’s safe to say that you’ve seen impressive capital growth.
Many investors have the long-term in mind when purchasing a buy-to-let, especially if they’re using a mortgage to fund the property. When investing for the purpose of capital growth, factors like an area’s long-term desirability come into effect. It’s also important to factor in capital gains tax when it comes to long-term appreciation, which is the amount you need to pay on profits made after a sale.
How to look for yield and capital growth potential
Lower-priced homes in emerging areas tend to be the best bets for increased yields. In Manchester, for example, the average yield is above 5%, but the typical property price is only around £185,000 – though there are many cheaper options too. In London, areas along the Elizabeth Line are still proving to be smart investments, especially with the delay of the service going live.
Capital growth tends to be more about funding retirement or having something to leave to your children, and so more central, established areas are more popular.
Capital growth or yields: which one is better?
In an ideal world, landlords will enjoy both capital appreciation and high yields. However, there is no definitive answer for which one is best. It comes down to your own preference and what you want from your buy-to-let investment.
If you’re renting out a home to make an income, then yields will be the most important factor. However, if it’s a long-term investment that you plan to keep for the next 10-15 years, capital growth will likely be your primary gain.
Understanding the yields and growth
Whatever your reason for purchasing a buy-to-let property, it’s important to have a good grasp of yields and capital growth. Doing so will help you make a more informed decision, and you can be more confident that your purchase yields the results that you’re looking for.
If you’re enjoying our content, why not check out the Landlord Hub. There are loads of resources, from information about tax to buy-to-let hotspots. And if you’ve got a property that you want to rent out, get in touch, and we can put your home in front of 700,000-plus derived renters.