Jump to content
House Price Crash Forum
Sign in to follow this  
Guest Baffled_by_it_all

Yields?

Recommended Posts

Guest Baffled_by_it_all

I'm not a huge fan of BTL - well ok I hate it. In fact I think there should be financial weighting in favour of people who are buying a place to live.

There's a lot of talk about yields on here. Are we even sure the bulk of amateur BTLs even care about yields?

Aren't most mum and dad - second home owner BTL landlords just bothered about having someone paying off their mortgage with the rent so they can have a nest egg at some point in the future.

The deposit is probably MEW'd out of their own home anyway so are they looking for a yield at all?

Just how long will they hold onto these properties in an adverse financial situation. Will they take a loss of £100 a month?

Share this post


Link to post
Share on other sites

In my experience the vast majority of BTL investors have very little or no clue, as to what net rental yield they are achiving on their investments.

Share this post


Link to post
Share on other sites
Guest Winners and Losers

In my experience the vast majority of BTL investors have very little or no clue, as to what net rental yield they are achiving on their investments.

Or even what rental yield is and how to calculate it. I know BTL'ers project (yes, project!) their yeild at 22% over 3 years - not realising that they are anticipating capital gain of 22% over 3 years in order to achieve this 'yield'. Works in a rising market, but what happens if the market stagnates? 0% yield over 3 years?

Share this post


Link to post
Share on other sites

I'm not a huge fan of BTL - well ok I hate it. In fact I think there should be financial weighting in favour of people who are buying a place to live.

There's a lot of talk about yields on here. Are we even sure the bulk of amateur BTLs even care about yields?

Aren't most mum and dad - second home owner BTL landlords just bothered about having someone paying off their mortgage with the rent so they can have a nest egg at some point in the future.

The deposit is probably MEW'd out of their own home anyway so are they looking for a yield at all?

Just how long will they hold onto these properties in an adverse financial situation. Will they take a loss of £100 a month?

It amazes me that BTL's don't often honestly assess their CURRENT yield. Yields falling can be due to reducing income (rent) or increasing capital value. To miss the sell signals of a reducing yield is very amateurish - especially when there are likely better returns (yields) to be had elsewhere.

JY

Share this post


Link to post
Share on other sites
Guest Baffled_by_it_all

Again, I think you're giving them too much credit.

I think most say

I'll buy a house for £200,000. The rent will cover the mortgage and in 25 years I'll own the place and it'll be worth £500,000 or whatever.

No worries about yields, no cost projections nothing...

Share this post


Link to post
Share on other sites

Again, I think you're giving them too much credit.

I think most say

I'll buy a house for £200,000. The rent will cover the mortgage and in 25 years I'll own the place and it'll be worth £500,000 or whatever.

No worries about yields, no cost projections nothing...

Quite - there's no point scolding them for not doing the yield sums the way we'd like them to. Most of them simply aren't looking at it in those terms.

Besides which if the price is rising and the yield is therefore falling, most of them will just see it as more profit for them, rather than pondering on "sell signals" and the like.

Share this post


Link to post
Share on other sites
Guest Baffled_by_it_all

I think the only thing that will shake them out of the market is if the price of their house drops or the cost of their mortgage increases so it's more than the rent. They're only thinking in those terms

If that's the case I'd be interested in seeing how many land back on the market. Enough to cause big problems I'd say...

Share this post


Link to post
Share on other sites

Quite - there's no point scolding them for not doing the yield sums the way we'd like them to. Most of them simply aren't looking at it in those terms.

Besides which if the price is rising and the yield is therefore falling, most of them will just see it as more profit for them, rather than pondering on "sell signals" and the like.

Yield is ultimately the only way to look at a BTL investment. Either the BTLs think:

1. prices will continue to rise,

2. rents will rise in line with capital value (restoring yields) or

3. prices are no longer going to rise at such a pace so the profit has already been made.

If, as seems likely, it is 3. then they should sell.

It really is that simple.

JY

Share this post


Link to post
Share on other sites
Guest Baffled_by_it_all

Yeah, er but my point is that they don't think like that.

They're quite happy to watch property programmes and read about HPI but most of them don't know one end of a calculator from another.

And there are LOADS of them out there.

Edited by Baffled_by_it_all

Share this post


Link to post
Share on other sites

Yield is ultimately the only way to look at a BTL investment. Either the BTLs think:

1. prices will continue to rise,

2. rents will rise in line with capital value (restoring yields) or

3. prices are no longer going to rise at such a pace so the profit has already been made.

If, as seems likely, it is 3. then they should sell.

It really is that simple.

JY

It might seem that simple to you, but I still say that's not how they're looking at it.

If you read the sorts of stuff they say (eg Rosie Millard, Singing Pig, wherever) it's a very common theme that they are in for "the long term". They expect prices to rise over the long term. In the short term all they are concerned about is cashflow. So long as they are breaking even (or in some cases even losing a limited amount) the idea is to continue to hold the property.

Actual falls or long term stagnation, or increased short term losses (eg from IR rises or voids) might start to shake that attitude. But rising prices will just be seen as proof that the long term plan is sound. Even if the yield is low now they may well expect your number 2. rising rents to bail them out over the next decade or so.

I don't like it either but just saying "If I was a BTL I'd look at the yield and sell signals, so they should do the same" is irrelevant because that is not their psychology at this stage. IMHO...

Share this post


Link to post
Share on other sites

It might seem that simple to you, but I still say that's not how they're looking at it.

If you read the sorts of stuff they say (eg Rosie Millard, Singing Pig, wherever) it's a very common theme that they are in for "the long term". They expect prices to rise over the long term. In the short term all they are concerned about is cashflow. So long as they are breaking even (or in some cases even losing a limited amount) the idea is to continue to hold the property.

Actual falls or long term stagnation, or increased short term losses (eg from IR rises or voids) might start to shake that attitude. But rising prices will just be seen as proof that the long term plan is sound. Even if the yield is low now they may well expect your number 2. rising rents to bail them out over the next decade or so.

I don't like it either but just saying "If I was a BTL I'd look at the yield and sell signals, so they should do the same" is irrelevant because that is not their psychology at this stage. IMHO...

I think you are right in how they behave but ultimately this behaviour will bite them on the **** (because they ignore the simple rules) and they will wish they had sold when they could - the smart ones will have sold out by now and will wait for yields to improve before re-entering.

I suppose I can understand a landlord with a portfolio of properties built up since the 70's, say, holding on - he enjoys the relatively hassle-free income on very low book value - but even he must consider selling at these CURRENT yields.

I didn't even mention the effect of price falls on the analysis. :o

JY

Share this post


Link to post
Share on other sites

I'd say most of the people in BTL with only 1 'extra' house/flat, are just looking to get a tennant to cover the mortgage cost, so that in 25 years, they have the 'extra' house paid for. A landlord with many houses is probably far more clued up on yields and suchlike, but the average joe punter isn't, and probably doesn't need to be. The simple concept of 'someone else paying your mortgage' is the reason why so many people have jumped into BTL. Most people (probably rightly) assume that they will have a house worth a fair bit in 25 years, and that all they have paid for it is maintenance costs.

*note: I am not a property bull, and a BTL investment at this moment is probably a bad idea (struggle to get enough rent to cover mortgage costs).

**also, feel free to shoot me down, I understand the points of view of those proposing that the way small-time BTL's go about things is very amateurish. That is sort of the whole point of why they are doing though. My uncle has a BTL flat himself. It's possible that he will do ok out of it. However, if he was to trade stocks, currencies, commodities etc etc, he would lose. Absolutetly guranteed.

The only thing that will really kill the amateur BTL's is if the economy really turns bad, and there is a lot of unemployment and/or high interest rates. Once the mortgage costs get too much for the people with 2nd homes, (either because of high interest rates, lack of rental money from jobless tennants/no tennants, or both) then they will sell the properties. If this happens on a fair scale, then we have a HPC.

Share this post


Link to post
Share on other sites

I think you are right in how they behave but ultimately this behaviour will bite them on the **** (because they ignore the simple rules) and they will wish they had sold when they could - the smart ones will have sold out by now and will wait for yields to improve before re-entering.

Yes, I do agree the smarter ones will be the ones who do understand what a yield is and some of them may get out while the going's good. They need to have a fairly hefty paper profit to get out unscathed though, because of the transaction costs, CGT, costs of making it look nice to sell for a decent price, void from evicting tenants to sale date.

I saw one Rosie Millard piece where she tried to sell up, got the tenants out, cleaned it up, then couldn't sell for the ludicrous price she was asking so just let it out again. :o

Traditionally landlording was a long-term venture for a minority - you'd build a portfolio over time, and selling up wasn't the aim so much as a stable rental income. But now that everyone and his dog is doing it I think it will go sour for many, and eventually go out of fashion again. But I think in many cases they will have a grinding realisation over a period of years with voids, repairs and so forth.

Share this post


Link to post
Share on other sites

A few points -

(1) The only comparable investment would be a 20% deposit (ie leveraged) FTSE tracker (not strictly comparable as this would be more risky - shares are more risky than property - but better perfoming than property and would have much less specific risk). BTL is a simple, easy to understand leveraged investment.

(2) The yield on current value is irrelevent, but I do concede that the yield on current value minus selling costs (CGT, EA fees, mortgage redemption penalties, etc etc) is more relevent than initial yield.

(3) Total returns are the important thing, ie yield plus capital gain (unless you have purchased for income only in which case you may wish to look at yield only).

(4) I could choose to look at things another way. I am making 5% per annum income (after costs but before tax) on the deposit I put down. This is an acceptable return. In addition I have purchased an asset that will (long term) pin a leveraged proportion of my wealth to the wealth of the country (in real terms). Any capital gains that I have made in the short term are meaningless, especially given the possibility we are in an about-to-burst bubble.

FF

Share this post


Link to post
Share on other sites

(2) The yield on current value is irrelevent, but I do concede that the yield on current value minus selling costs (CGT, EA fees, mortgage redemption penalties, etc etc) is more relevent than initial yield.

(3) Total returns are the important thing, ie yield plus capital gain (unless you have purchased for income only in which case you may wish to look at yield only).

FF

Could you explain your "The yield on current value is irrelevent" - this seems to be the crux of the matter in terms of how different people analyse their investments in property and I think there is a lot of muddled thinking. Yes, of course you have to consider the transaction costs in calculating the net realisable capital value and hence the effective current yield.

Current yield implicitly takes into account the unrealised capital gain (or loss). Ultimately, as in the dividend discount model, you can reduce the value of a property to the discounted value of the net cash flow it can generate over its life (rent minus all costs) - capital gain doesn't enter this calculation, it is implicit in the cash flows.

If the cash flow is negative or only just covers the mortgage now, you are relying on rents increasing for there to be any capital gain in the future. Or you are relying on over leveraged muppets over-paying when there are more rational alternatives (such as renting and investing), which is unsustainable bubble behaviour.

Current yield is very relevant.

JY

Share this post


Link to post
Share on other sites

Could you explain your "The yield on current value is irrelevent"

I think Fred's point (from what he wrote elsewhere) is that when you work out the yield against current value, it is to assess the opportunity cost - ie could you make more elsewhere by selling up and investing the money somewhere else.

But the costs of selling and CGT reduce the capital that is actually available. So a house sold for £400K might actually only generate £350K after costs and tax are taken care of, and this is the sum you would be able to reinvest (after paying off mortgage).

So his theory (which seems reasonable) is that if as a BTL you are looking at yields for a sell signal, the reduced value (the money you could actually access) would be the maximum amount you would logically consider when calculating yield.

In one sense this is a bit of a fiddle because it makes the yield look better. But on the other hand it probably is an rational way of calculating whether or not the current capital value suggests that you should sell up or not.

Edited by Magpie

Share this post


Link to post
Share on other sites

To most amateur BTL'ers a "Yield" may as well be a small, furry, nocturnal animal indigenous to the plains of Outer Mongolia.

Seriously though check out the link below. I know it is from a few weeks ago but the audio links at the bottom explain the sentiment pretty well here in Ireland (I'm sure the UK is not much different)

http://www.rte.ie/business/2006/0329/property.html

Share this post


Link to post
Share on other sites
Guest Baffled_by_it_all

You're imposing your own financial savvy on people who haven't a clue.

I've got a degree in Physics and I can barely keep up with you lot sometimes.

Share this post


Link to post
Share on other sites

Could you explain your "The yield on current value is irrelevent" - this seems to be the crux of the matter in terms of how different people analyse their investments in property and I think there is a lot of muddled thinking. Yes, of course you have to consider the transaction costs in calculating the net realisable capital value and hence the effective current yield.

Current yield implicitly takes into account the unrealised capital gain (or loss). Ultimately, as in the dividend discount model, you can reduce the value of a property to the discounted value of the net cash flow it can generate over its life (rent minus all costs) - capital gain doesn't enter this calculation, it is implicit in the cash flows.

If the cash flow is negative or only just covers the mortgage now, you are relying on rents increasing for there to be any capital gain in the future. Or you are relying on over leveraged muppets over-paying when there are more rational alternatives (such as renting and investing), which is unsustainable bubble behaviour.

Current yield is very relevant.

JY

I think Magpie has summed up my postion pretty well... thx Magpie for saving me the typing!!!!

Yield on current value less selling costs - a sensible way of looking at things, in terms of analysing the amount of monney that you'd have available to invest somewhere else. Current Yield if defined as [current rent pa / current market value] is irrelevent as you can't access market value. (The motgage is also pretty irrelevant because an investment should work whether you borrow none or all of the money)

If you want to do a DCF for a property investment (I am doing them now as it goes!!!!!) then you can put in a anticipated future sales price, or you can assume you will hold in perpetuity.

Surely if you are assuming holding forever (ie never selling) then the DCF will cover current rent (and rental growth if you create a more sophisticated model), but will take no account of future capital value as you are never going to sell (and therfore are never going to get an inflow apart from rent)?

There is a very strong argument that you should use fundamentals to analyse true value of property. To me fundamentals are -

how much does the "sort of person who would live in that type of house" earn? And what sort of deposit would they have? (ie 4 bed detached houses might be lived in by execs earning 50k but they can easily afford to pay 250k because they have built equity for 10 years before they buy the 4 bed detached.

Secondly, what is the yield? I believe 9% is a long term average yield, but arguably 7% is a reasonable long term yield now that interest rates / inflation seem to be relatively under control compared to much of the last 40 years.

I believe that if you have purchased a property as a BTL with a negative cashflow then you are stupid, as the poor yield is proof that the market is in bubble more (maybe the one exception would be a quaint country cottage which is not in an area of demand for renters but you buy as a 5 year hold with negative cashflow when you know there will be 5 years capital growth to offset the rental losses - this does not apply anywhere in the west now!!!!! ie you buy for capital not rental value - because you believe what you are buying is just not a renter but will produce better than average capital gains).

BUT, just because buying a BTL is a bad idea it does not mean selling is a good idea.

Edited by Father Fred

Share this post


Link to post
Share on other sites

I think Magpie has summed up my postion pretty well... thx Magpie for saving me the typing!!!!

Yield on current value less selling costs - a sensible way of looking at things, in terms of analysing the amount of monney that you'd have available to invest somewhere else. Current Yield if defined as [current rent pa / current market value] is irrelevent as you can't access market value. (The motgage is also pretty irrelevant because an investment should work whether you borrow none or all of the money)

Yes, as I said above you should net out transaction costs to work out the current yield.

If you want to do a DCF for a property investment (I am doing them now as it goes!!!!!) then you can put in a anticipated future sales price, or you can assume you will hold in perpetuity.

Surely if you are assuming holding forever (ie never selling) then the DCF will cover current rent (and rental growth if you create a more sophisticated model), but will take no account of future capital value as you are never going to sell (and therfore are never going to get an inflow apart from rent)?

There is a very strong argument that you should use fundamentals to analyse true value of property. To me fundamentals are -

how much does the "sort of person who would live in that type of house" earn? And what sort of deposit would they have? (ie 4 bed detached houses might be lived in by execs earning 50k but they can easily afford to pay 250k because they have built equity for 10 years before they buy the 4 bed detached.

Secondly, what is the yield? I believe 9% is a long term average yield, but arguably 7% is a reasonable long term yield now that interest rates / inflation seem to be relatively under control compared to much of the last 40 years.

I believe that if you have purchased a property as a BTL with a negative cashflow then you are stupid, as the poor yield is proof that the market is in bubble more (maybe the one exception would be a quaint country cottage which is not in an area of demand for renters but you buy as a 5 year hold with negative cashflow when you know there will be 5 years capital growth to offset the rental losses - this does not apply anywhere in the west now!!!!! ie you buy for capital not rental value - because you believe what you are buying is just not a renter but will produce better than average capital gains).

BUT, just because buying a BTL is a bad idea it does not mean selling is a good idea.

What I am getting at here is where does future capital gain (i.e. your future expected sales price in your DCF) come from?

I am saying that ultimately it comes from the present value of the cash the investment can generate - rent minus all costs in perpetuity (or if you are an owner occupier, from the rent you do not have to pay). To anticipate future capital growth is to anticipate future rental growth, which as you point out is linked to the fundamentals: what can people afford and what are their alternatives.

Brainclamp, for one, has repeatedly stated the view that rents will increase once the music stops and some are left holding property and the rest will form the down-trodden rentier class. Is this what the recent BTL's are assuming so they can afford to ride out the low yields at the start of their investment? I think not.

So where is the capital growth coming from if not increased rents? People have got so used to capital growth in property that they have forgotten what underpins it - i.e. rental yields.

Another question for you FF - if your target is 7% yield (net, in your pocket) what is the maximum you will pay for an example property today? As you say you need to get the 7% on your equity portion as well. I'm not sure if there is anything out there that will yield 7% in the long term at today's prices - but I'm happy to be proved wrong.

JY

Share this post


Link to post
Share on other sites

Yes, as I said above you should net out transaction costs to work out the current yield.

What I am getting at here is where does future capital gain (i.e. your future expected sales price in your DCF) come from?

I am saying that ultimately it comes from the present value of the cash the investment can generate - rent minus all costs in perpetuity (or if you are an owner occupier, from the rent you do not have to pay). To anticipate future capital growth is to anticipate future rental growth, which as you point out is linked to the fundamentals: what can people afford and what are their alternatives.

Brainclamp, for one, has repeatedly stated the view that rents will increase once the music stops and some are left holding property and the rest will form the down-trodden rentier class. Is this what the recent BTL's are assuming so they can afford to ride out the low yields at the start of their investment? I think not.

So where is the capital growth coming from if not increased rents? People have got so used to capital growth in property that they have forgotten what underpins it - i.e. rental yields.

Another question for you FF - if your target is 7% yield (net, in your pocket) what is the maximum you will pay for an example property today? As you say you need to get the 7% on your equity portion as well. I'm not sure if there is anything out there that will yield 7% in the long term at today's prices - but I'm happy to be proved wrong.

JY

JY

I'm with you now. (I think).

Firstly, when I said I was currently doing property DCFs I didn't mean that I was doing them in relation to myself - I am studying at the minute.

Let me see if I understand you...

(1) Property is ultimately valued by fundamentals, one of which is rents. I agree.

(2) A DCF is a good way of assessing value. I agree.

(3) "So where is the capital growth coming from if not increased rents?" I almost agree. Wage rises will drive capital values either directly or through upward pressure on rents. My gut feeling is that rents may be due rises as they have not risen for ages - but saying that they're not low now. Capital values are clearly high in relation to wages so there is not likely to be any great rises soon.

So, to my mind a good way of assessing what to pay for a property investment is a DCF. But I would not use that same DCF to work out the sales value in ten years time (well I wouldn't work out the future value as I don't know when I'm going to sell). If you wish to include the sales price a damn fine way of working it out would be to work out where your property is compared to the UK National average, (eg valued at 120% of the UK national average), then draw the trend line for UK prices forward 10 years (or whatever the hold time is) and then work out 120% of that.

I would not buy property as a BTL at todays prices. I think BTL is a brilliant investment at 60% of current market value. I think this is a rational level. Saying that I think that there is a strong likelihood that BTL has become so mainstream that we'll always have BTLers from now (until the law is changed). For many people, with a bit of spare cash and wishing to complement an equity-based pension, property at current value less 25% may be very sensible as a BTL.

I cannot see any sense in property investing at the moment unless you are buying below market value and selling quickly.

Share this post


Link to post
Share on other sites

All that stuff about yields is correct, but you're missing the main motivation for most BTL-ers: they regard BTL as money for nothing, prompted by those awful property programmes.

'It's simply' they say - 'buy a property, get some mug to pay the mortgage through rent, and whether property prices go up or down, at the end of the day (c 25 years), I've got a property - for nothing!'

This, at least, is the way one BTL person explained it to me - they've got someone paying their mortgage through housing benefit.

Share this post


Link to post
Share on other sites

Just Yield

An advertised 7.5% net yield, retail property in Dagenham.

Commercial property

I saw some properties go for auction which had very good yields according to the guide price. They sold for prices well above the guide price that gave the "standard" 4.5% (or so) gross yield. Sometimes I wonder whether these "high yield" properties are just teasers that are supposed to pull people in who spot a good deal, and then bid against each other until it's a bad deal.

Billy Shears

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.

  • 302 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.