How to Work Out Your Rental Income
If you’re investing in property, understanding your rental income is a vital part of the process as it underpins any future decisions you make down the line. This is important for investment planning over the long-term, where multiple factors can impact your bottom line. Likewise, knowing how much rental income you stand to make is important for your mortgage application, as this affects how much you can lend. In this article, we discuss how to work out your rental income, including the gross and net figures, as well as other important equations that can support your planning.
What is rental income?
Put simply, rental income is the rent that a landlord gets from the tenants in their buy-to-let properties. That said, there is a lot more than goes into determining rental income and multiple factors that impact how much a landlord should charge.
While the majority of your rental income will come from the rent the tenant pays, it can also include additional charges that you may offer including:
- Maintenance or repairs to the property
- Communal area maintenance such as cleaning
- Utilities such as heating, hot water or internet
Rental income can vary amongst different properties and landlords, especially as services, property sizes and locations differ. Ultimately, to get a good idea of your overall rental income it’s important to consider every possible form of income that you might receive within your investment.
How to work out your rental income
Determining your rental income comes down to several factors including the quality of the property, the level of demand for rental property in the area, comparable rental properties and in some cases, applying the ‘1%’ rule.
It’s important to get a balanced rental rate for your property. The rent should be low enough that you remain attractive in the market but not so low that you can’t turn a profit. Adjusting the rents on a property as the market changes is important, as is recognising the potential rents that your property can command in the local area. So what are the key considerations that impact your rental income?
Quality of the property and property value
A major driver of potential rental income is the current value of the rental property and its overall quality compared to other rental properties. Remember, the property value is not necessarily the same as when you purchased it, particularly with an off-plan property. If you’d purchased a property in Birmingham a year ago for example, the property value would have increased by several thousand pounds at the time of writing.
Consider the quality of the fixtures and fittings throughout the rental property. A property that has a balcony or terrace, brand new appliances and some of the mod-cons you’d expect in a new-build apartment, for example, will help determine your rental income. The higher the quality, the more you’ll typically be able to command in rent.
Related: Why Buy Quality Property in the First Place?
Look at comparable rentals in the area
Understanding the local market is an easy way of establishing how much rent you should be charging. Knowing how much comparable rental properties charge in terms of letting gives you a benchmark that you can work from going forward. If you have a two-bed property in Derby, for example, then your research will likely highlight the range of rents that you can command in the area.
Once you factor in additional amenities such as on-site gyms, restaurants or services, however, you may realise that your property has an edge in the market and can actually command much higher rents. Having this information to hand is part of your due diligence as an investor, while having these types of amenities or build quality can make your life much easier.
Demand for rental property
As always, scarcity can have a huge impact on how much rental income you can charge.
If you’re renting out one of the only apartments in a city with a high level of demand for that property type, you can afford to charge more. Within your ‘competitor research’, identify how many rental properties there are in the city, as well as the level of demand for that kind of property.
Things to look out for include:
- The number of listings in the area
- What different property types are available in the area?
- Price to rent ratio (is it more expensive to own a home or rent?)
- How long do listings stay on the market?
- How long do renters typically rent for in the area?
Do 2-bed apartments barely hit the market before they’re snapped up in a week? This could be a key indicator of the possibility for higher rental income and a top priority for investment.
Discovering demand for a property can be difficult and this is where working with a third party can pay dividends. Local letting agents or estate agents will be able to provide a good idea of demand for different property types in a location and it can pay to get their feedback early.
The 1% rule
While this isn’t a hard and fast rule for investment, you may have seen some investors mention the 1% rule. This suggests that a landlord should charge 1% of the property value as a baseline rental price. For example, if a property is worth £100,000, the landlord should charge £1,000.
This isn’t always possible in most UK markets, especially in areas such as Prime Central London where prices are much higher and 1% rental prices would be unrealistic. In reality, it’s best to use market research and speak with local experts that can provide a more balanced view.
Potential expenses
Once you understand how much you’re charging, you need to know if there’s any associated costs that might impact your overall return. This could be things such as maintenance, ground rent, service charges or third-party management fees. Factor these into your income and you’ll get a better idea of what you actually stand to make.
Having an idea of these costs early – even if it’s a ballpark figure – can inform how much you need to charge in terms of rental income.
Working out your rental income as a rental yield
By now, you should have a good idea of what your property is worth and how much you stand to make each month in rental income.
These two figures are all you need to work out the rental yield of the property – a widely used metric that offers a topline example of what you can expect to earn.
Rental yields are split into two categories – gross rental yield and net rental yield.
Related: What is a good rental yield?
The gross rental yield is what your property stands to make purely based on its current value and rental return, with no expenses considered. This is a fairly simple sum that uses the rental income over a year.
- Find out your annual rental income (monthly rent x 12)
- Divide your annual rental income by the price you paid for the property
- Multiply the answer by 100
In practice, this looks like this:
- Annual Rental Income = £12,000 (£1,000 x 12)
- Property Price = £200,000
- £10,000 / £200,000 = 0.6%
- 0.6% x 100 = 6%
- Rental Yield = 6%
The net rental yield is what your property stands to make based on the current value and rental income with all of the expenses factored in.
This requires making a minor change to the original equation by deducting your expenses from your rental income before dividing it by the current value.
How to easily calculate your rental income
As you can see, understanding your rental income is a vital part of your investment, especially at the outset.
If you want to quickly work out your rental income, as well as the other financial factors around your investment planning, you can download our Investment Calculator here.
Our Investment Calculator is designed to provide a complete overview of your investment plan, detailing the expenses, returns and yields you can expect to see.