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Hi,

A few weeks ago someone posted a formula for calculating the true cost of a house from the rental by using, I believe, a multiple of 60. I can't remember what it was now - mutliply the rent by 60 or was it to divide the HP by 60? Or something else?

Why 60?

Cheers.

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Try this calculator - http://www.bmsolutions.co.uk/products/btl/btlcalcs.asp

Paragon now claim average achieved rental yield is 7%

Sarah Beeney says you should aim for a 10% return.

Use these percentages on the rental prices you have and see what the HP comes out as.

10% yield seems to be a kind of basic guide yes. should this be after counting in all the expenses and what have you?

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Thanks guys, but I am not looking for a yield as in a BTL.

I am looking for for the formula that someone posted with regards to looking at the advertised rent of the property and doing some maths - the ratio of 60 was involved - to determine the TRUE price of a house.

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looking at beenys 10% yield

lets say house costs 100k

10k needs to be made in profit

lets say 2k a year for everything else including empty periods ect

so a 100k house would need to give you a rental of 300 pounds a week to achieve the 10%

here in blackpool a 100k house rents for 100 pounds per week

1/3 of that

a bank pays 5% and you dont need to worry about some tenent wrecking the place or empty yields ehhhh

edit

and i forgot to add the fact your paying intrest on the loan, the 3.3% yield i worked out only works if you bought the place out right, hence 5% yield in a bank.This totaly proves btl only works if you get capital appreciation, and even the bulls talk now of stagnation in prices ie no capial appreciation.

Edited by homeless

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Thanks guys, but I am not looking for a yield as in a BTL.

I am looking for for the formula that someone posted with regards to looking at the advertised rent of the property and doing some maths - the ratio of 60 was involved - to determine the TRUE price of a house.

Yeah i have looked for that formula before and did not find it, i seem to remember Dr Bubb saying that when trying to put a value on a property you should calculate it on what sort of return you would get if it was a BTL, that's when i did a search for a BTL calculator and found the one i posted above.

Using that calculator on a property near me that is for rent at £575 pcm, or for sale at £135,000, with a 7% return means either the property has to fall to £98,500 or the rent has to go up to £788 pcm.

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I did a sum once against a new build £350,000 house

The rental income was £1000 a month.

So I took 350,000 divided it by 100 and then multiplied it by 85

Why?

Because BTL mortgages require a 15% deposit and the result would be the amount borrowed.

so I have

(350000/100) * 85 =

£297,500 borrowed.

Lets take the loan at 4.9% (current repayment rates there abouts.

so how much interest is that a year?

(297500/100) * 4.9 =

£14,577.5 per annum interest.

or

£1214.79 a month.

So if our intrepid investor has bought the property as claimed for £350,000 and has an 85% mortgage and the only cost he has is the interest against the loan

then he is loosing £214.79 a month

£2577.48 a year.

and that is if the only cost is interest, which it isn't

I know its not the sum you were looking for.. but it is interesting.

A mortgage calculator would show repayment aswell.

for example

£1741.44 is a monthly repayment mortgage... against the 85% mortage for £350,000

http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

add to that leasing agent fees, insurance against the building and maintainence, plus allowing for the vacant times..

I can't see the math working.. at all..

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I did a sum once against a new build £350,000 house

The rental income was £1000 a month.

So I took 350,000 divided it by 100 and then multiplied it by 85

Why?

Because BTL mortgages require a 15% deposit and the result would be the amount borrowed.

so I have

(350000/100) * 85 =

£297,500 borrowed.

Lets take the loan at 4.9% (current repayment rates there abouts.

so how much interest is that a year?

(297500/100) * 4.9 =

£14,577.5 per annum interest.

or

£1214.79 a month.

So if our intrepid investor has bought the property as claimed for £350,000 and has an 85% mortgage and the only cost he has is the interest against the loan

then he is loosing £214.79 a month

£2577.48 a year.

and that is if the only cost is interest, which it isn't

I know its not the sum you were looking for.. but it is interesting.

A mortgage calculator would show repayment aswell.

for example

£1741.44 is a monthly repayment mortgage... against the 85% mortage for £350,000

http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

add to that leasing agent fees, insurance against the building and maintainence, plus allowing for the vacant times..

I can't see the math working.. at all..

+ the investor will forego the bank interest on the £52500 deposit - £2100pa in a 4% interest account

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Umm, I bought a flat in 1992 (at the bottom of the market) for 11 times annual rental. The ratio today would be 20. Mind you, banks paid about 12% on deposits in 1992 whereas today they pay about 7%.

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It's very simple in theory.

The value of a house is the NPV of expected future cash flows (=rents net of costs), appropriately discounted (ie adjusted for expected future inflation).

If the house is in owner occupation then the rent is the putative value to the owner of being able to live in the house.

The key point is that the house price is derived from the rent not the other way round.

Any ratios or other formulas are just rules-of-thumb.

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Are you sure it wasn't 16?

A 7% yield is about 1/16th of the value of a house. So multiply the rent by 16 to get an approximately fair value.

I guess that is like a P/E ratio for shares of about 16, which is also about average. After all, property is just another asset class.

Just out of interest TTRTR, what do think of this, a good investment?

House for rent (North Dublin):

Annual Rent = €17,000

Purchase Price approx = €650,000

Stamp Duty (at NINE PERCENT!!!) = €58k (Now that's what I call dead money!)

Price to Rent Ratio: 41 !!!!!

(I'm not making these numbers up - I am the tenant)

But everyone tells me, "Renting is dead money"...blah...blah...blah...Am I missing something here, or has everyone gone f*cking mental?

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Never pay more than 12 times the annual rent and sell it if it becomes worth 20 times the annual rent.

That's an excellent rule of thumb and precisely the one that my Grandmother used who was a property speculator for the best part of 50 years.

She never bought above 12 and always sold at 20 arguing that property was over-valued at this point. Often she stayed out of the market completely; if she was still alive I strongly suspect that she would have liquidated everything. in 2003/4.

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so for a flat with, say £50/mnth ground rent, and, say £550/mnth rental value furnished, and 2 months void per year, would you take it all into account, ie annual rent equalling

(550-50)*10 = £5000 annual rent, from which to calculate the multiplier?

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Well, if you use 12 months rental and multiply by 12 then virtually any property you look at is hugely over-valued currently.

In other words, be 'generous' in what the rental income might be, multiply it by 12 and you still get a sale price that is often less than 50% of the current advertised price for the property.

I've just down this on numerous properties in my area that are both to let and for sale and every single for sale price is at least 50% more.

Oh, a house near me that has been for sale for about a year now has just had the 'for sale' sign changed to 'to let'. :-)

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Professional investors used to use the 12/20 rule.

Never pay more than 12 times the annual rent and sell it if it becomes worth 20 times the annual rent.

On that basis, and doing a some searches on rightmove, much if not all property from the Midlands moving South would appear to be over the 20x marker. I don't know about the North of the country because I never follow trends up there. Anyone care to comment?

Can we assume that using this rule, the bulk of professional investors are, or have already quietly off-loaded their portfolios, and the market is now inhabitted mainly by amateurs?

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My rental works out at 3.27% of the property value (based on the asking price of a similar property in our road). When agents fees and maintenance are added on, the yield is probably around 2.5%. If the chap is paying tax, the final yield is probably around 2%.

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Can we assume that using this rule, the bulk of professional investors are, or have already quietly off-loaded their portfolios, and the market is now inhabitted mainly by amateurs?

I know of two, IMPO, 'slum landlords' with numerous properties in Swansea for about 20 years each who both finished selling all their properties about 2 years ago.

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Anecdotal

House for sale in Warwick - £448,000 asking price (Connells). Alternatively rent it unfurnished (via Margetts, another agent !) for £1100pcm (£1300 furnished).

You choose !

Yield is about 2.9% on these figures. On the 12/20 rule even at 20 it would have to reduce in price by 50%.

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Thanks guys, but I am not looking for a yield as in a BTL.

I am looking for for the formula that someone posted with regards to looking at the advertised rent of the property and doing some maths - the ratio of 60 was involved - to determine the TRUE price of a house.

I thought that in market terms that was based on the value of rent in relation to the base rate. 10% is a bad deal if interest rates are 15%. 7% is a very differerent proposition if you can get 10% by putting the money in the bank. Therefore, for a house with a rental income of 7000 per year:

at 5% interest rates the house is worth 140,000 but

at 10% interest rates the house is worth 70,000

Of course there are other costs that you might need to take into account in a real world situation. that is how it was explained to me anyway. Any economists about?

(This is why Nu Lab is so opposed to interest rate hikes. When people THINK there house is worth 140K they FEEL GOOD. Equity is a rubber band. Retracts? No feel good factor!)

Edited by Elizabeth

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Actually, I now remember it was The Economist who earlier stated this year that the p/e 'value' of property in the UK was 60. Ouch!

Are you sure?

That would imply a yield of 1.6%.

My guess is yields in Belgravia are probably around 3%, rising to 5% in outer London, and probably 6% futher out.

The economist has used price/rents in the past.

I'd guess the current P/R ratio is probably around 25 (4% yield).

TTRTR is probably right about the historic 16.

That would make houses about 56% over-valued ((25-16)/16).

And we need prices to fall 36% to come back to historic averages.

Edited by BandWagon

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  • 301 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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