What does rental yield and capital growth mean?

If you are considering investing in property for the first time you will have come across two important phrases: rental yield and capital growth. Even though you can experience both of rental yield and capital growth at the same time, they represent two completely different things. We go into more detail below to help you understand what rental yield and capital growth mean.

What does rental yield mean?

The money you make back, or expect to receive, on any property you purchase is referred to as rental yield. This is an important tracker used by landlords and property investors to ensure they are maximising the value of the properties they own.

When investors are comparing rental properties, the rental yields will quickly show them which one is going to be more lucrative. Of course, there are other factors they will consider before making a final decision, but the rental yield will play a prominent role.

Calculating rental yield

The key information you need to calculate rental yield is either the price paid for the property or how much it is currently worth on the market, and the annual rental income you ideally want in return.

The annual rental income total is divided by the current property value or purchase price. You then multiply this figure by 100 to find out the percentage. This then represents your rental yield. For example:

Annual rental income: £10,000

Purchase price: 200,000

Rental Yield: 5%

What are gross and net yields?

A gross yield is the same as the example above. This means the rental income is taken as a percentage. When it comes to net yields, other costs such as mortgage payments, insurance and maintenance also have to be accounted for in order to find out your final profit.

Rental yields in different regions

When you invest in a house in London, it is likely to be far more expensive than buying a property in Manchester or Nottingham, for example. Rent prices will also vary wildly depending on where the house or property is situated. This means rental yields differ from region to region, so this should also be considered.

What is capital growth?

This is sometimes referred to as capital appreciation. It means how much your property (or properties) have increased in value. You can also add this figure to the rental yield to get an idea of the total return you can make on the property.

An easy way to understand capital growth is to use the following example:

Purchase price: £400,000

Current value: £465,000

Capital growth: £65,000

The reason why some properties increase in value more than others comes down to a number of contributing factors. This is in addition to the availability and demands for housing in the current property climate.

When you are looking to invest in a property, look out for things such as plans for new transport links or current popular transport links, regeneration of the area, or the building of new infrastructure. These will have a positive effect on future prices as the area becomes more attractive to residents and the market value of properties will also naturally increase.

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