Jump to content
House Price Crash Forum
Sign in to follow this  
woody

Btl Sale Calculation

Recommended Posts

I know that there are lots of people on here who love to do the calculations of rental yield but this one seems to take the £%$&. I can't be bothered to do the maths on it but...

The property is on the market for £610,000 but is let out at £2,300 per month.

Japan Services

When I initially saw the property, I thought it looked quite nice - high price but nice area and decent(ish) sized house. Could be worth a look... However, as it is not possible to move in and there would be a £27,600 annual income offsetting an annual £36,600 cost of capital (annual interest - not repayment) - assuming a 6% IR and assuming no discount to sticker price, I thought WTF.

I know that this is not uncommon but advertising a property with such a huge negative yield is daft - isn't it? Is this representative of BTL bailout situations? - high price, an obviously low (negative) yield but won't budge on price?

Share this post


Link to post
Share on other sites

That's an odd one. Given the area, something in the £550-£600K region doesn't seem outrageous (at current prices...), and another on the street went at £580K in 2002. If they were selling it vacant it might make sense. But marketing it with a tenant whose rent won't cover the market seems bizarre, unless the tenant is going to go - maybe they haven't really thought this through.

I suspect they've had the house for a long time and having moved away are letting it out (at about the market rent - big houses in London don't get rented that much, but also get a rent that is relatively low compared to the sale price). So they're asking a reasonable price, but need to sell it empty, not with a tenant in situ. It's on Rightmove as well, but doesn't mention the tenant...

Share this post


Link to post
Share on other sites
Guest Winners and Losers

I can't be bothered to do the maths on it but...

Less than 5% yield. Jeesh, why bother. :rolleyes:

Share this post


Link to post
Share on other sites

Actually the yield is 4.5%, which is pretty much the going rate at the moment (at least in my area).

How do you work that out? - I don't usually pay much attention to yield calculations, but it looks to me as though an IO mortgage at current rates on this amount would be a negative yield. How did you you do it?

Share this post


Link to post
Share on other sites

How do you work that out? - I don't usually pay much attention to yield calculations, but it looks to me as though an IO mortgage at current rates on this amount would be a negative yield. How did you you do it?

4.5% yield is fine as long as houses are going up in price, as the capital appreciation will make up the difference. If house prices are stagnant or declining then putting the money in a bank account will give better return at less risk.

Billy Shears

Share this post


Link to post
Share on other sites

4.5% yield is fine as long as houses are going up in price, as the capital appreciation will make up the difference. If house prices are stagnant or declining then putting the money in a bank account will give better return at less risk.

Billy Shears

Thanks Billy, but Young Goat's calculation of 4.5% looks wrong to me, so I was wondering if I was doing the sum a different (wrong) way.

How would you work that yield out?

Edited by Magpie

Share this post


Link to post
Share on other sites
Guest Winners and Losers

Thanks Billy, but Young Goat's calculation of 4.5% looks wrong to me, so I was wondering if I was doing the sum a different (wrong) way.

How would you work that yield out?

Annual rent as a percentage of the price of the property. 4.5% is about spot on.

Share this post


Link to post
Share on other sites

Thanks Billy, but Young Goat's calculation of 4.5% looks wrong to me, so I was wondering if I was doing the sum a different (wrong) way.

How would you work that yield out?

£2300pcm * 12m = £27600 gross rent per year.

27600/610000 * 100 = 4.52459016393442622900%

Billy Shears

Edited by BillyShears

Share this post


Link to post
Share on other sites

4.5% yield is fine as long as houses are going up in price, as the capital appreciation will make up the difference. If house prices are stagnant or declining then putting the money in a bank account will give better return at less risk.

Billy Shears

Yes and no.

4.5% is well below any sensible yield and strongly indicates the presence of a bubble.

The point is that the best indicator of the "true" value of a house is the rent it commands.

If prices are going up then low yields are ok but the point is that you are gambling on prices moving even further from their true level, a very poor bet IMHO.

Share this post


Link to post
Share on other sites

£2300pcm * 12m = £27600 gross rent per year.

27600/610000 * 100 = 4.52459016393442622900%

Billy Shears

OK I see now. I suppose I was loosely imagining that when people talk about a 5% yield, they meant they were making a 5% profit. But when you take into account the current interest on a mortgage or opportunity cost (ie interest you could make elsewhere on a deposit) a 5% yield is only really breaking even at current rates.

If that's the case, it makes me realise just how foolhardy an idea BTL is in a stagnant or falling house price environment...

Share this post


Link to post
Share on other sites
Guest Winners and Losers

OK I see now. I suppose I was loosely imagining that when people talk about a 5% yield, they meant they were making a 5% profit. But when you take into account the current interest on a mortgage or opportunity cost (ie interest you could make elsewhere on a deposit) a 5% yield is only really breaking even at current rates.

If that's the case, it makes me realise just how foolhardy an idea BTL is in a stagnant or falling house price environment...

That is why I don't understand it when TTRTR harps on about how good a 6% yield in London is. If I had kept my flat in London my yield would now be 20%. Now that's what I call a good yield. He obviously didnt apply the buy low sell high rule himself. :rolleyes:

Share this post


Link to post
Share on other sites

That is why I don't understand it when TTRTR harps on about how good a 6% yield in London is. If I had kept my flat in London my yield would now be 20%. Now that's what I call a good yield. He obviously didnt apply the buy low sell high rule himself. :rolleyes:

I did catch him out doing some dodgy maths the other day. Maybe he really is as as stupid as he looks.

Also helps to explain all those new-builds offering "Guaranteed 4% yields" and so on. "You pay us way too much for this flat - we stick your money in the bank and give you a bit less than the interest, and even that only if you manage to make a claim stick against our slippery legal team..."

Brilliant, I'm just off to buy a £300K new-build with a "guaranteed yield" round the back of the gasworks.

Share this post


Link to post
Share on other sites
Guest Winners and Losers

Brilliant, I'm just off to buy a £300K new-build with a "guaranteed yield" round the back of the gasworks.

Make it snappy Magpie, I've heard they are 'flying off the shelves', wouldnt want to miss the boat now would we. ;)

Share this post


Link to post
Share on other sites

That is why I don't understand it when TTRTR harps on about how good a 6% yield in London is. If I had kept my flat in London my yield would now be 20%. Now that's what I call a good yield. He obviously didnt apply the buy low sell high rule himself. :rolleyes:

You really should calculate the yield on the current market value, not the historical cost.

This is the thing I keep banging on about. Rental yields of 4.5% don't make sense, not only do you need to pay the mortgage interest, you also need to think about repairs, agent fees and void periods.

All in anything much below 9% doesn't work, but to get 9% house prices would have to halve.

Share this post


Link to post
Share on other sites

You really should calculate the yield on the current market value, not the historical cost.

This is the thing I keep banging on about. Rental yields of 4.5% don't make sense, not only do you need to pay the mortgage interest, you also need to think about repairs, agent fees and void periods.

All in anything much below 9% doesn't work, but to get 9% house prices would have to halve.

I see the logic of that, but it's pretty obvious that someone who bought at say 40% below current prices will do the sums based on the mortgage they are actually paying, which is less than the mortgage they would pay if they bought now. So even if the yield is technically worse, it doesn't make any actual difference to their cashflow, which is what matters to them. That may not be "rational" but it's how they will see it.

This thread really does make me realise how dumb it would be for a BTL to buy at 4-5% at this stage though. Because even if we have small rises from here, it's basically a loss-making proposition, and if we have stagnation or falls it's a disaster.

However I still don't agree with you that yield should be how OOs or FTBs assess property prices. Why should I make my decisions based on landlords' rules? I grant that it's useful to look at average yields and see that in general property is overpriced - and this is a good guide to that. But when it comes to an individual property I want to live in, there are different issues involved.

Share this post


Link to post
Share on other sites

OK I see now. I suppose I was loosely imagining that when people talk about a 5% yield, they meant they were making a 5% profit. But when you take into account the current interest on a mortgage or opportunity cost (ie interest you could make elsewhere on a deposit) a 5% yield is only really breaking even at current rates.

If that's the case, it makes me realise just how foolhardy an idea BTL is in a stagnant or falling house price environment...

It gets tricky if you are leveraged, i.e. you have a mortgage on the property. If your mortgage rate is the same as your gross yield, then the gross yield you get on your investment stays the same no matter how small your actual deposit/investment is on the property. However there is a problem. The amount that you spend on maintenance/fees is the full amount no matter how small your investment, as well as to the full cost of voids. Also, you're exposed to the full risk/reward of capital gains/losses. So BTL with a large mortgage is a remarkably risky proposition. Without the expectation of capital gains, it's, IMHO, a mugs game.

Billy Shears

Share this post


Link to post
Share on other sites
Guest Winners and Losers

You really should calculate the yield on the current market value, not the historical cost.

Right you are (tongue in cheek). Current market value yield for my London place would be 6%.

Value of house in Australia hardly shifted, so yield still about 5%, but this is not in a city, so I think its not bad all things considered, could be worse.

The amount that you spend on maintenance/fees is the full amount no matter how small your investment, as well as to the full cost of voids. Billy Shears

This is why I don't want to make a rental profit from my property in Oz, it would be minimal in any case and I want to be in a negative gearing position, so I can reap all those lovely tax rewards when I do go back. It makes more sense for me to keep the property negatively geared.

Share this post


Link to post
Share on other sites

All in anything much below 9% doesn't work, but to get 9% house prices would have to halve.

8 is still easy in aberdeen I think.

Share this post


Link to post
Share on other sites

This is why I don't want to make a rental profit from my property in Oz, it would be minimal in any case and I want to be in a negative gearing position, so I can reap all those lovely tax rewards when I do go back. It makes more sense for me to keep the property negatively geared.

Yes that's why I'm making a whacking loss on my £1 million property portfolio too, for the tax benefits... :blink:

Share this post


Link to post
Share on other sites

I see the logic of that, but it's pretty obvious that someone who bought at say 40% below current prices will do the sums based on the mortgage they are actually paying, which is less than the mortgage they would pay if they bought now. So even if the yield is technically worse, it doesn't make any actual difference to their cashflow, which is what matters to them. That may not be "rational" but it's how they will see it.

If they do this, they are not calculating their return on their currently invested "wealth" but an old figure which was the previous value of their investment.

In another thread I used this analogy.

Assume that you invest 10K at 7%. Interest is calculated yearly and the interest deposited in the account. After two years your principal grows to £11449. Then you get a letter from the bank saying that they are dropping their interest rate to 6.5%. Do you feel deflated because the interest being paid on your investment is going down, or do you feel happy because the interest you will receive this year is £744, which is a return of 7.44% on your original investment?

Billy Shears

Share this post


Link to post
Share on other sites

If they do this, they are not calculating their return on their currently invested "wealth" but an old figure which was the previous value of their investment.

In another thread I used this analogy.

Assume that you invest 10K at 7%. Interest is calculated yearly and the interest deposited in the account. After two years your principal grows to £11449. Then you get a letter from the bank saying that they are dropping their interest rate to 6.5%. Do you feel deflated because the interest being paid on your investment is going down, or do you feel happy because the interest you will receive this year is £744, which is a return of 7.44% on your original investment?

Billy Shears

No, I understand the argument, I just think it's no good saying they "should" do the sums this way, when they probably don't. I see people here arguing that when the yield drops too low because prices have risen, BTLs "ought to sell up", but I think the cashflow matters more to BTLs. Firstly because there's a big difference between a small monthly profit and an actual loss. And secondly because of the mantra that so long as you're breaking even you're winning from the long term capital gain (dodgy argument, I know, but I'm trying to understand the thinking...)

And in a way it's not quite the same as your example. It's more like you're making £650 (say) a year in interest. Then next year, they tell you you've magically got £12,000, and you're still making £650 a year. So you've got £2K more, and you're making the same each month. Your yield's lower yes, but you aren't looking at it that way.

BTLs are only likely to understand they have a problem if prices go down (ie you're told actually it was a mistake and now you've only got £8K) or if yields drop so they are making less, or losing money on a regular basis.

Share this post


Link to post
Share on other sites

8 is still easy in aberdeen I think.

8 is marginal, can't get anything like that in most of the south east (always seems to be sub 5% except for HMO).

Not sure what london yields are like, is 6% of current market value the norm?

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 338 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.