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What Is An Adequate Rental Yield?

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Simple Question (ah, but it's the simple ones, you may say...):

What is an adequate net rental yield?

I'm not looking for a number, just a calculation. What are the significant variables?

Would you just do a simple comparison between:

( [Annual Rent - Annual Taxes and Other Costs] / [Market Value - Cost of Selling] )

versus

( [Market Value - Cost of Selling] x Deposit Interest Rate ) ?

Should the former be a few percentage points higher than the latter, or would they effectively be the same?

This might be the dumbest question ever, but it seems like it's one that very few people consider.

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I believe the market moves in a cycle with a yield of around 5% at the market top and around 10% at market bottom.

The past boom got so crazy that yields were bottoming at around 4% or so (2-3% in Dublin WTF!).

So the 'average' historical gross yield should be around 7-8%. This is where I believe 'fair value' to be. On this basis the market has some way to fall as it always undershoots the average 'fair value' before returning.

The only question is with interest rates at 0.5%, will nominal prices fall massively to bring the average yield to the 10% mark or will inflation raise rents to create a 'real' price property crash? Time will tell.

Edited by ringledman

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Yeah, I mean, one might expect the value of a house to be equal to the PV of the rental payments [net of outgoings] you'd earn from it in perpetuity by renting it out, and you'd discount these using an appropriate cost of capital figure etc.

In practice people tend to apply simple rules of thumb to gross rental yields.

Here are some examples.

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Both very useful answers, thank you (although flying pig, you scared me a bit there with your first sentence! Good link though)

Is there any cause for thinking these considerations would be different for agricultural land, as opposed to housing? If so, how would it compare? Is there something about agricultural land that would make a lower yield acceptable, or should it be around the same as housing?

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Both very useful answers, thank you (although flying pig, you scared me a bit there with your first sentence! Good link though)

Is there any cause for thinking these considerations would be different for agricultural land, as opposed to housing? If so, how would it compare? Is there something about agricultural land that would make a lower yield acceptable, or should it be around the same as housing?

Agricultural land has a very low yield 3% or so. Has been like this for a while.

Agri land is shooting up in value, aqround £5K an acre now in Wales where I know. Still a lot lower than most Western European countries. Better value in Agri land than property by a mile IMO.

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Simple Question (ah, but it's the simple ones, you may say...):

What is an adequate net rental yield?

(...)

Like they say about the carry trade: "picking up pennies in front of a steam roller." In that case, currencies fluctuations were much more important than the tiny spread in annual interest rates. In your case, the value of the asset is much more relevant than the rental yield.

.

Edited by Tired of Waiting

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Agricultural land has a very low yield 3% or so. Has been like this for a while.

Agri land is shooting up in value, aqround £5K an acre now in Wales where I know. Still a lot lower than most Western European countries. Better value in Agri land than property by a mile IMO.

Why is that, though? Is there something intrinsic to agricultural use that makes a relatively low yield inevitable, or is it just something to do with the current state of the mixed-up crazy world we live in?

When you say 'has been like this for a while', what time scale are you talking about? The past couple of years, or the past couple of hundred years, or something in between?

This is turning out to be quite interesting...

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It depends what you think the house you buy is going to be worth in the future. I don't think that I'd be interested in buying to let unless I could be guaranteed a 15% yield for at least a five year period.

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Why is that, though? Is there something intrinsic to agricultural use that makes a relatively low yield inevitable, or is it just something to do with the current state of the mixed-up crazy world we live in?

When you say 'has been like this for a while', what time scale are you talking about? The past couple of years, or the past couple of hundred years, or something in between?

This is turning out to be quite interesting...

I'm not sure why. Perhaps yields were higher in the 90s. I remember agri land in North Wales being £3k/acre in the 90s/00s for a while. People thought it was cheap. It has shot up to the £5-6k mark now.

However I think yields were still poor in the 90s. Example from then - 7.5 acres was let to a farmer for around £500/year so low yield of 2.5% or so.

Seems strange that yields were low then when property was undervalued.

Compared to Germany / Ireland etc agri land is cheap I believe.

If I had a nice wad of cash to spare I would put at least half into agri land despite the recent rises.

Edited by ringledman

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I'm not sure why. Perhaps yields were higher in the 90s. I remember agri land in North Wales being £3k/acre in the 90s/00s for a while. People thought it was cheap. It has shot up to the £5-6k mark now.

However I think yields were still poor in the 90s. Example from then - 7.5 acres was let to a farmer for around £500/year so low yield of 2.5% or so.

Seems strange that yields were low then when property was undervalued.

Compared to Germany / Ireland etc agri land is cheap I believe.

If I had a nice wad of cash to spare I would put at least half into agri land despite the recent rises.

Yes, I know what you mean about agricultural land behaving strangely. It gets so much less airtime in the mainstream media (and on HPC) that it is harder to get a handle on. It's partly to do with there being much less liquidity (fewer transactions, especially with strangers) and less frenzied speculation.

I'll come clean: the reason I'm asking is, I own a fair chunk of agricultural land abroad, with family. For many years I have taken a 'silent partner' approach, but steadily rising market values for the land (yes, yes, I know) makes me think the rental yield we are getting from current tenants is quite low. We have only been renting it outside the family for 6 years.

Part of the rising value is down to low interest rates, I know, but there are pretty strong fundamentals - rising commodity prices, a billion Chinese people wanting to eat beef more often (those cows have got to eat something) and a recent lifting of the restriction on foreign ownership. Global warming is going to be kind to that part of the world as well (Canada), though maybe I am getting ahead of myself in thinking that that has ben factored in to the rising prices.

The yield we're getting is down to about 2% though, which seems a bit on the low side.

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It depends what you think the house you buy is going to be worth in the future. I don't think that I'd be interested in buying to let unless I could be guaranteed a 15% yield for at least a five year period.

I'd be interested in any investment that guaranteed a 15% yield over a 5 year period!!!! Has such a thing ever existed?

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It depends what you think the house you buy is going to be worth in the future. I don't think that I'd be interested in buying to let unless I could be guaranteed a 15% yield for at least a five year period.

Do you mean 3% per annum or 15% per annum?

If the latter, please email me and let me know where to sign up.

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I'd be interested in any investment that guaranteed a 15% yield over a 5 year period!!!! Has such a thing ever existed?

I've no idea, but it's what would be necessary for me to even consider buying a house, that I believe will lose 40% of it's value, in return for a rental yield. Actually, I'd probably probably turn down 15%, don't forget that yield is a percentage of market value and I expect market value to fall sharply.

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It depends what you think the house you buy is going to be worth in the future. I don't think that I'd be interested in buying to let unless I could be guaranteed a 15% yield for at least a five year period.

+ 1

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I've no idea, but it's what would be necessary for me to even consider buying a house, that I believe will lose 40% of it's value, in return for a rental yield. Actually, I'd probably probably turn down 15%, don't forget that yield is a percentage of market value and I expect market value to fall sharply.

+ 1

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Houses are a bit like bonds in that the 'yield' determines the capitalisation price rather than vice versa.

So if your property yielded £10k per annum then work out how much you would need to achieve this in the bank and you'll have an idea of a realistic selling price.

To achieve £10k interest you'd need £2mill in the bank based on the 0.5% rate, if rates moved to 5% you'd only need £200k. This is why the BofE slashed rates; they needed to keep the housing market bouyant.

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Houses are a bit like bonds in that the 'yield' determines the capitalisation price rather than vice versa.

So if your property yielded £10k per annum then work out how much you would need to achieve this in the bank and you'll have an idea of a realistic selling price.

To achieve £10k interest you'd need £2mill in the bank based on the 0.5% rate, if rates moved to 5% you'd only need £200k. This is why the BofE slashed rates; they needed to keep the housing market bouyant.

At the 3.9% interest that I'm getting from NS&I, I only need to have £257K to achieve £10K ;).

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I've no idea, but it's what would be necessary for me to even consider buying a house, that I believe will lose 40% of it's value, in return for a rental yield. Actually, I'd probably probably turn down 15%, don't forget that yield is a percentage of market value and I expect market value to fall sharply.

Mate, with respect, what are you smoking?

If market values fall, then, all else equal, the yield rises. And vice-versa.

Go look up the definition of rental yield somewhere and then come back , we'll wait.

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Mate, with respect, what are you smoking?

If market values fall, then, all else equal, the yield rises. And vice-versa.

Go look up the definition of rental yield somewhere and then come back , we'll wait.

Pompous **** :rolleyes:

I was talking about a guaranteed 15% yield, not a guaranteed rental income.

Market value = £200K, 15% yield = £30K

Market value = £100K, 15% yield = £15K

Go boil your stupid head :lol:.

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The key part of the equation is:

Annual Taxes and Other Costs

The biggie most people forget is maintenance.

To be on the safe side allow £2k a year for a house, that will mostly go on big lumps such as re-roofing, kitchen, bathroom, external guttering which you can delay for a few years but eventually has to be done. If there is any structural work budget much higher.

Insurance for a let property will be higher than your own house.

Make s sensible allowance for voids as well.

So for a £200k purchase I would want to take out say £3k for maintenance, insurance & sundry. Say 10% voids (if only frictional) and 10% agency fee (a guess - is this right?) then to achieve a return of 7% (ok, no need to be greedy) then I need:

200 * 7% = 14,000 net. Gross up for agency fee and voids to give 17,284 add £3k for maintenance and other costs and required rental income is:

Annual: 20,284

Monthly: 1,690

Which seems a bit steep for a £200k house on which the mortgage would currently be at 6% £1,000 a month plus £250 (3000/12) of maintenance and other costs so £1,250 a month or £440 less to buy.

IMO if BTLers really added up the true costs, including voids, agency fees and the maintenance that they will need to do at some stage they would realise that they make a revenue loss every year and are reliant upon a capital gain that may or may not materialise. They of course don't do this and instead take gross monthly rent less gross monthly mortgage and think they're doing well.

Edited by Frank Hovis

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Guest Steve Cook

Simple Question (ah, but it's the simple ones, you may say...):

What is an adequate net rental yield?

I'm not looking for a number, just a calculation. What are the significant variables?

Would you just do a simple comparison between:

( [Annual Rent - Annual Taxes and Other Costs] / [Market Value - Cost of Selling] )

versus

( [Market Value - Cost of Selling] x Deposit Interest Rate ) ?

Should the former be a few percentage points higher than the latter, or would they effectively be the same?

This might be the dumbest question ever, but it seems like it's one that very few people consider.

An adequate rental yield is whatever a free market will stand for.

However, since the market is not free, This truism does not apply to the UK rental market in any way, shape or form.

Edited by Steve Cook

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  • 261 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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