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Will!

What's A 'fair' Yield For My Landlord?

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I'm renting a studio flat in Southampton for £395 pcm. My landlord paid £95,000 for it in 2003 (and someone else paid £36,500 for it in 2000). I happen to know that the letting agent charges 5%. Buildings insurance is probably around £300. I don't know how much the service charge is, although I do know the it pays for a part-time gardener who lives in one of the flats.

My back-of-an-envelope calculations give a yield of about 4%. Is this around 'normal'?

Cheers

Will

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I'm renting a studio flat in Southampton for £395 pcm. My landlord paid £95,000 for it in 2003 (and someone else paid £36,500 for it in 2000). I happen to know that the letting agent charges 5%. Buildings insurance is probably around £300. I don't know how much the service charge is, although I do know the it pays for a part-time gardener who lives in one of the flats.

My back-of-an-envelope calculations give a yield of about 4%. Is this around 'normal'?

Cheers

Will

Normal means the herd average. The herd went through a patch of buying overpriced properties and justifying it by saying that prices would go on up.

Your 4% sounds probable and suggests the landlord hasn't fully accounted for voids (gaps between tenants), bad debts (but you're a good guy), maintenance or rises in interest rates.

There will be landlords whose lifestyles have been subsidized by low interest rates; and it could be that as interest rates rise they find themselves having to top the mortgage payment from their earned income. If they are unable to top up then what follows is a forced sale scenario in a low property price context.

In short you might find you need somewhere else to live in a hurry. Food for thought.

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In my experience BTL investors look to achieve 7-10% yield.

crickey! were do I sign?

I suppose it depends how you calculate your yield.

for example I have 2 paid for flats bought for around 40k 15 years ago. Back then they returned 400, so excluding voids/tax/repairs (to make it simple) a yield of 12% (i tend to assume 8 months to account for tax and repairs so the yield is 8% - I rarely have voids due to their location). they are estimated at 100k each today but only return 550, so the yield has gone down to 6.6% (in reality more like 4.4%).

you could assume that I am getting 16.5% based on what I paid for in 95 but you would be mistaken because if I sold and used the money to invest elsewhere I would only need a return of a lot less than 16.5% to get the same return. in fact on one of my savings account I get 4.5% tax free which is more than I actually get on my flats!

the thing is that I don't care what the yield is in my case, it has long been paid for, the rent I earn covers the rent I pay in the UK and ultimately these flats will go to my kids.

so cut a long story short, I doubt anyone is getting 10% in the UK and if they are getting 7% good on them. at the current ridiculous UK prices I can see anyone making much return. I will take a significant fall for yields to return to acceptable levels hence why those who think any fall will see BTLers hoover cheaper houses are probably wrong.

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About 4% sounds about right to me with the market at this level.

It's about what I'm getting on my gaff in London on the fairest valuation I can come up with for it.

People who bought before prices went utterly mental will of course be doing better as a percentage of their real investment.

As for the sense of holding such a poorly performing asset?

Even if it's not as easy as it used to be to get out of UK real estate, it still sure is difficult to get back in.

And what to do with the moolah on the liquidation of the asset?

Spend a few weeks down the bookies?

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a financial asset needs to compensate you for the risk-free rate of return (the return on depositing with the government that prints the money), expected inflation (or there would be no point investing as in real terms it would shrink), and then a return for the risk of the asset. Oh, and any costs too!

Real estate is a long-term sterling asset, so you would price it off the long end of the uk treasury yield curve. That is about 4-4.5pc at the moment. Real estate is a pretty 'safe' asset so you wouldn't expect the return to be too different to that, although we can quibble over things like costs (which would raise the required yield, but then are often tax deductible).

It's no coincidence that long term fixed mortgage rates are similar to long-term gilt yields as they too are priced off them. And it's also no coincidence that house yields are similar to long term mortgage yields as that credit is basically the best estimate of the cost of mortgage finance over the long term, which is the normal cost of buying a property for most people.

The one major aspect I haven't discussed is capital gains, a source of return which is not in the yield explicitly. Over the past 20 years it seems that ongoing capital gains made people willing to accept a lower yield as they assume the required return will be met or exceeded by gains. A lower yield on the same rental means higher prices. We still seem to be at a point where people are not pricing in potential capital losses!

So the yield he is getting is in the right ballpark but too low, and frankly with house prices so stretched and the fact that he is barely earning the same as gilts he would be better off sticking the money in those and not wasting time on property management! Implicitly he must be assuming prices continue to rise noticeably to be a good investment!

Edited by Princeofpounds

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I agree - most BTL investments offer very poor returns of 4-5% gross, which means much less when you factor in maintenance costs and exposure to the risk of rising interest rates. It's odd when tenants say rents are "too high": you only have to look at these rates of return to see that landlords make no real money and aren't exactly profiteering. In fact tenants get a great deal - no costs or responsibilities except to pay the rent and behave civilly, a slave landlord to do all your maintenance work and safety checks, and no exposure to house price crashes or interest rate changes. Rent isn't "money down the drain": the same can be said of mortgage interest - it's just the price of the capital employed to occupy the property, and tenants gain all the time because they get the benefit of the landlord's capital whilst also saving their own deposit. Homeowning is a mug's game.

a financial asset needs to compensate you for the risk-free rate of return (the return on depositing with the government that prints the money), expected inflation (or there would be no point investing as in real terms it would shrink), and then a return for the risk of the asset. Oh, and any costs too!

Real estate is a long-term sterling asset, so you would price it off the long end of the uk treasury yield curve. That is about 4-4.5pc at the moment. Real estate is a pretty 'safe' asset so you wouldn't expect the return to be too different to that, although we can quibble over things like costs (which would raise the required yield, but then are often tax deductible).

It's no coincidence that long term fixed mortgage rates are similar to long-term gilt yields as they too are priced off them. And it's also no coincidence that house yields are similar to long term mortgage yields as that credit is basically the best estimate of the cost of mortgage finance over the long term, which is the normal cost of buying a property for most people.

The one major aspect I haven't discussed is capital gains, a source of return which is not in the yield explicitly. Over the past 20 years it seems that ongoing capital gains made people willing to accept a lower yield as they assume the required return will be met or exceeded by gains. A lower yield on the same rental means higher prices. We still seem to be at a point where people are not pricing in potential capital losses!

So the yield he is getting is in the right ballpark but too low, and frankly with house prices so stretched and the fact that he is barely earning the same as gilts he would be better off sticking the money in those and not wasting time on property management! Implicitly he must be assuming prices continue to rise noticeably to be a good investment!

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I agree - most BTL investments offer very poor returns of 4-5% gross, which means much less when you factor in maintenance costs and exposure to the risk of rising interest rates. It's odd when tenants say rents are "too high": you only have to look at these rates of return to see that landlords make no real money and aren't exactly profiteering. In fact tenants get a great deal - no costs or responsibilities except to pay the rent and behave civilly, a slave landlord to do all your maintenance work and safety checks, and no exposure to house price crashes or interest rate changes. Rent isn't "money down the drain": the same can be said of mortgage interest - it's just the price of the capital employed to occupy the property, and tenants gain all the time because they get the benefit of the landlord's capital whilst also saving their own deposit. Homeowning is a mug's game.

That depends an awful lot on when they bought the property. Take 2 identical properties, same rents, one LL bought in 2002, the other in 2006.

Rather different yields, I should have thought.

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Normal means the herd average. The herd went through a patch of buying overpriced properties and justifying it by saying that prices would go on up.

Your 4% sounds probable and suggests the landlord hasn't fully accounted for voids (gaps between tenants), bad debts (but you're a good guy), maintenance or rises in interest rates.

There will be landlords whose lifestyles have been subsidized by low interest rates; and it could be that as interest rates rise they find themselves having to top the mortgage payment from their earned income. If they are unable to top up then what follows is a forced sale scenario in a low property price context.

In short you might find you need somewhere else to live in a hurry. Food for thought.

I'd agree with you, except that the herd still thinks that 4% is a good yield and is still buying at that value.

tim

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That depends an awful lot on when they bought the property. Take 2 identical properties, same rents, one LL bought in 2002, the other in 2006.

Rather different yields, I should have thought.

Yield should be calculated on current market value.

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Yield should be calculated on current market value.

And the interest on the loan to "Buy" the asset should be taxable..

same as it would be if you got a loan to buy shares in BP.

Either a BTL is an investment or its a business. If its a business, yeild is irrelevant, what you are looking for is Gross Profit - expenses and costs = profit.

But as its an investment opportunity for the masses, then the loan you get to capitalise it is NOT a business expense and should be taxed.

THEN we would see BTL outlawed by taxation as they wouldnt be taking up the OO space with tax breaks.

RANT OVER.

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Thanks for all the replies.

Two years later I'm trying the same calculation in reverse on a three-bed semi-detached house which is to let and I would like to offer to buy (to live in) in south-east Hertfordshire.

The house was briefly listed for sale at £350k last spring with one EA and is now listed to let with two letting agents (neither the original EA) at £1350 pcm. No sale data on Land Registry and not a repo. I'm going to assume it lets for within 10% of what's asked. Any ideas what sort of yield I should assume to do my back calculation of a price to offer?

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Some investors do not care about the yield especially if they purchase with cash.

Most investors here in Swansea are looking for 14% + and we have ways to achieve this with a basic terraced property that would let for £500 pcm yet we manage to get £800 pcm.

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I'm now renting a one bedroom flat in south-east Hertfordshire for £750 pcm. Bought by my landlord in December 2014 for £128,000. I don't know what the LA charges, or what the service charge or building insurance are, so all I can say with any certainty is that the gross yield is 7%. Is this around what others pay?

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I'm now renting a one bedroom flat in south-east Hertfordshire for £750 pcm. Bought by my landlord in December 2014 for £128,000. I don't know what the LA charges, or what the service charge or building insurance are, so all I can say with any certainty is that the gross yield is 7%. Is this around what others pay?

Nowhere near.

Id expect to pay 750 for a property that would sell today for 230k+

I wouldn't pay more than 400 pcm for a place like that.

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Now six years on, my circumstances have changed and I'm looking at a two-bedroom flat in Arun, West Sussex, and doing the reverse calculation again.  It's being sold by a BTLer who bought in 2012 for £140k and has put in a new kitchen and bathroom and doesn't currently have a tenant.  A similar flat sold for £190k last year, although I don't know what was that flat's internal condition.  The asking price is £215k and the EA estimates can be let for £800 pcm giving a gross yield of 4.47%, which seems pretty poor to me and gives me hope I can haggle the asking price down.  Any ideas what kind of yields BTLers are getting in this part of England?

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  • 312 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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