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Tue 29 Mar 2022

For landlords, one of the most crucial aspects of your buy-to-let investment is your ability to generate a good rental yield.

Along with capital appreciation, rental yields are indicative of how much profit you could make in rental income and will determine whether you can cover the cost of your buy-to-let mortgage.

Whether you’re a seasoned landlord with years of experience, a new landlord getting to grips with your investment, or a prospective landlord considering your first foray into the buy-to-let market, it’s important to understand how rental yields work and what they mean for you.

Here, we put together a comprehensive guide on rental yields and how landlords in Scotland can achieve a good yield to see healthy returns on their buy-to-let investment.

Gross rental yield

Put simply, rental yield refers to the value of the rent you can expect to receive from your property on an annual basis, represented as a percentage. This can be calculated in two different ways: gross and net.

The gross yield identifies the basic overall figure before deducting your expenses. This is calculated by taking the yearly rental income of a property and dividing it by the property purchase price.

As an example, if your property costs £180,000 and you charge £9,000 per year in rent, you’d have a gross rental yield of 5%.

Net rental yield

The net yield, however, includes the costs associated with the property – such as maintenance, insurance, mortgage, etc. To calculate this, you take the annual rental income minus associated costs, then divide by the property value.

Off the back of the previous example, if the annual rent is £9,000 and the associated costs is £1,000, then the annual profit would be £8,000. Divide this by the property cost of £180,000, and the net rental yield becomes 4%.

For this reason, the net yield is more helpful as it allows you to discern where you could reduce costs to increase your yield.

How can you increase your rental yield?

With the market becoming increasingly competitive, landlords might find it more challenging to increase their rental yield. However, there are small measures you can take to improve your returns.

Review your asking rent: This decision should only be made after careful consideration, factoring in contractual agreements and your tenants’ financial situations.

Invest sensibly: Be mindful of the type of investment you’re going for. Do you prefer a newer property with less maintenance, or an older fixer-upper with greater risks?

Review your outgoings: This may sound obvious, but always keep on top of your spendings. Consider setting a reminder to research alternatives – there are always more cost-effective options.

Check your mortgage renewal: There are a variety of products on the market, so ensure you shop around thoroughly. Always be mindful about switching, as this can ramp up prices.

What is the average rental yield in Scotland?

Many elements go into determining a good rental yield, such as the price of the property, rental demand, and location. As a general rule, a yield between 5-8% is considered a good return.

Fortunately, landlords in Scotland can check all three boxes. Rental yields here average 7.50%, with some areas appearing in the top 25 UK postcodes for yields.

Although they fluctuate from region to region, Scotland sits comfortably among the upper echelons of healthy returns. In fact, it was home to five of the top 10 highest-yielding locations in the UK in 2020, with Zoopla estimating yields above 7.5%. This is reflected in Scotland’s resilient rental market, with February 2022 seeing a 12.1% increase in average rental values compared to 2021, at £760 a month.

In West Lothian, where we are based, the average rent increased 9.6% year-on-year between July and September 2021, to £789.

This is fuelled by rising tenant demand for two and three-bedroom homes in the area, which offers more affordable options for growing families and remote workers in need of extra space to accommodate a home office.

In essence, yields are one of the most crucial signposts for understanding the health of your investment. Therefore, having a strong grasp of how they work and what you can do to influence them will be the key to succeeding in the Scottish buy-to-let market.

Here at Letting Solutions, West Lothian’s first dedicated lettings agency, we can guide you through all aspects of the lettings journey and can help you to get the most from your rental properties as a result.

Please don’t hesitate to contact us, even if you are not a current client. You can ring us on 01506 496006 where our team are waiting to help. Or you can email us at: rent@letting-solutions.co.uk.