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Hi. I'm researching property investment & have just gotten hold of the information below on selecting BTL property and calculating yield. Is the approach detailed below valid or invalid (the details have been taken from a TV production company that works on various property shows)

Oxford

For Oxford, we gave the example of a four-bed semi-detached property that was on the market for £299,950. We contacted letting agents in the area the property was situated. They confirmed that a property of this type could realistically hope to fetch £1200pcm in rental income. However, they also pointed out that if you converted the living room to a 5th bedroom, you could increase your monthly return by £300, meaning the property had the potential to yield £1500pcm. A normal buy to let mortgage would require a deposit of 20% of the total value. £300,000 minus 20% leaves £240,000 to be mortgage funded. At this level the rental value should cover the monthly mortgage payments due.

Further, we used a fairly standard formula to determine "rental yield": (i) Determine the anticipated monthly rental value; (ii) Multiply this figure by twelve to give annual rental income; (iii) Divide the annual income by the sale price and multiply the answer by one hundred to determine "rental yield". We were advised that a rental yield of 5% or more was the minimum you would require from an investment property. We calculated that the Oxford property could give an annual return of 6%. Our residential property investment consultant advised us that this was a fair and comfortable return.

The same rigorous approach was applied in identifying all our properties.

Let me know pronto please.

Researcher

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I'd say that looks marginal at best.

You haven't factored in any void months on those rooms.

Nor maintenance and repairs.

Nor agent's fees.

The only way I can see anyone making money on that one would be if prices continued to rise. And I don't think you'll find many people on this board who'll predict that on a medium-term basis.

The agent's statement that 5% yield is good: well, I'd put the deposit in the bank and not worry about what 5 students are doing to my investment.

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the property had the potential to yield £1500pcm. A normal buy to let mortgage would require a deposit of 20% of the total value. £300,000 minus 20% leaves £240,000 to be mortgage funded. At this level the rental value should cover the monthly mortgage payments due.

We calculated that the Oxford property could give an annual return of 6%. Our residential property investment consultant advised us that this was a fair and comfortable return.

* You have not in any way taken into account the costs of buying the property such as legal fees or stamp duty. Then there's void periods, and unexpected maintenance costs which can eat in to any profit very quickly.

Plus there is the time and money spent on finding suitable tenants in the first place. And the personal hassle of being a landlord.

* On a £240,000 repayment mortgage over 25 years, the Interest Rate only needs to exceed about 5.5% before you're paying over £1,500 a month. Interest Rates are set to rise by the end of the year.

* A 6% yield is absolutely rubbish given all the risk you're taking. Plus other investments such as the stock market and commodities have way outperformed property in the past few years.

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I'd say that looks marginal at best.

You haven't factored in any void months on those rooms.

Nor maintenance and repairs.

Nor agent's fees.

Nor Insurance

or Annual gas/electrical inspections

or the new council BTL fees.

BTL mortgages also carry an interest rate premium, and the markets are expecting at least a 4.75% base rate by Sept.

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I personally feel the calculation is a little optimistic as it doesn't take into account void periods, maintainace and you've assumed the top rental will be achieved.

Don't get me wrong I'm not trying to crush your dreams, but it pays to be pessimistic when it comes to money...

To you give you an example I've been looking at a property in Scarborough which is split into 4 flats @ £160k with potential monthly rent of £1,200 assuming you could let them all (£75 each per wk).

assume I placed a 25% deposit and did a IR mortgage the rest at 6% that equals 8.4k in interest for the sake of argument I'll round it up to 9k to include some maintainace (which is still optimistic).

i'll assume 2 months void and 10% commission goes to a letting agent so that's 10.8k

so overall i would be 1.8k better off every year - personally i think there's easier ways of making 2 grand.

(i don't take into account capital growth)

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Also, we need to consider the "opportunity cost" of your £60,000 deposit, leaving the money in a 5% savings account would produce £3000 gross per annum without any risk (aside from inflation) for doing sweet FA.

So you can factor in £200 a month net in lost interest, it gets worse as the years progress as this figure would normally compound in a savings account.

Also, £60,000 in other investments like the markets may well return a good deal more than 5%, as expected if there's a risk to capital (buying property on a margin can also be considered a risk to capital).

Edited by BuyingBear

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Well now I know why so many English can't do basic estimations of cost. The BBC, that most hallowed of institutions and leader in establishing cultural values, is itself as sloppy as an oyster and about as effective when it comes to basic 'its not rocket science its common sense' financial accounting (ie factor in all the reasonable variables). If the BBC actively promotes sloppy thinking around maths then why the hell is anyone else going to give it a priority?

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Buy To Let = Buy To Lose

BTL has it's place but only if the yield makes sense (haven't for a long time) - I've kept my eye on some auctions as the guide prices made sense but they went for way past the point of a wise investment to a 'god help them' liability.

There will be some opportunties out there but they'll involve buying at below current market values - I know that some landlords on singing pig leaflet council areas offering to 'help' people from their debt problems by buying thier property from them at 25% below market price.

Searching for BTL property on rightmove doesn't cut it, you'll have to find desperate sellers somehow and get to them before they go on the open market.

Edited by godsakes

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Searching for BTL property on rightmove doesn't cut it, you'll have to find desperate sellers somehow and get to them before they go on the open market.

Yes, but in that case why not just instantly flip the property and sell at the full market value? Assuming your purchase hasn't set a new low benchmark for true market values.

Edited by BuyingBear

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We were advised that a rental yield of 5% or more was the minimum you would require from an investment property.

Does "investment property" mean one where you are betting on the capital appreciation?

A bit like "growth stock" as opposed to "value stock" or "income stock".

5 or 6% is fine if you have no fear of a bit of negative cash flow and are prepared to do a massive leveraged bet on capital appreciation. Your potential losses if this does not pay off are of course huge.

If you are actually looking to take a sensible level of risk and generate an income, you'd want about 10% yield I'd say. This is perfectly possible if you select a high occupancy property carefully.

frugalista

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Yes, but in that case why not just instantly flip the property and sell at the full market value? Assuming your purchase hasn't set a new low benchmark for true market values.

there is a strong arguement to flip, and assuming i knew of a better investment to put my money in, i probably would (not everyone is a stockmarket daytrader).

but if the BTL was yielding well and had low hassle tennants - why not just keep it and let it generate a (reasonably) passive income.

Personally i would love to get me hands on some good yielding commercial properties - have them leased for 15yrs with the tennant taking care of the insurance and repairs.

residential just seems like so much hard work compared with commerical on paper

Edited by godsakes

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i hate that whole...'if we turn the living room into a bedroom' malarky.

Go on just squeeze as many people as you can into a property...mmmm....5 people sharing 1 toliet...and how much money do you want people to pay for a shit hole like that?

:angry:

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i hate that whole...'if we turn the living room into a bedroom' malarky.

Go on just squeeze as many people as you can into a property...mmmm....5 people sharing 1 toliet...and how much money do you want people to pay for a shit hole like that?

:angry:

The new HMO rules should help with those types of lets

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The advice on yields that I have seen is that a rental property should return 7.5% gross yield in order that the net yield will be worthwhile. 5% yield seems to be quoted recently, but IMHO only because people who want to ramp the property market can't admit that rental yields are insufficient nowdays.

Billy Shears

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Yeah good point re the 5th bedroom sloblock. If you remove the lounge you automatically reduce the rental value of the other 4 rooms.

The 5th room conversion also seems to indicate that you would be letting each room out individually on a seperate contract..hello more costs. I say this cos no individual is gonna rent a house out and go "gee thanks, l see you turned the lounge into another bedroom..great for all those sleep overs l keep having, l must give you another 300 quid a month"

If you are running a house on 5 contracts you will ALWAYS have a problem with voids.

Edited by DabHand

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i hate that whole...'if we turn the living room into a bedroom' malarky.

Go on just squeeze as many people as you can into a property...mmmm....5 people sharing 1 toliet...and how much money do you want people to pay for a shit hole like that?

:angry:

It's also a static view - as though removing a really central feature of a normal home like the living room wouldn't reduce the rent that people were prepared to pay. If that sounds too bolshie, researcher (my ****) should ask themselves whether people wouldn't be willing to pay considerably more per head for a house with a sitting room. 'Homes' without sitting rooms are student accommodation unless you're in the former soviet union.

I mean, apart from 'awooga'.

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This sounds very much like Kirsty & Phils Where Best to Invest - Number 1 property hotspot - Oxford.

Your yield is correct, but even a 6% yield is quite poor IMHO.

The costs you miss:

-Voids

-HMO (Houses in Multiple Occupation) - fire regs etc

-Purchase costs

-Conversion costs

-Maintenance (quite high if you have so many tenants)

Then facture in economic changes - e.g. interest rates going up

Also, if you were to lose the living room, surely it would reduce the rent you could get on other rentable rooms! I would expect a living room!!!

If it were a HMO I would expect a gross yield of around 8-10%.

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OK, I'm examining the stats to rightly questioned by Mr Brignall in the Guardian last week and therefore need BIG holes. Hoping to write something. Well Done That Man Jason! I will post additional Where Best To Invest questions soon. So their figures were optimistic, bud not wildly so?

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I thought rental yeild was supposed to be around 12%?

6%, you would do better on the stock market

5%, you could do better in a savings account

agency fees

voids

repairs

licencing

are going to eat into your 'yeild', in many places it is ALOT cheaper to rent and new landlords are literally subsidising there tenants... in the hope that capital gains will help them.

According the the Land registry, average selling prices of a terrace is down by 25% (march 2006), over the past year, to a average selling price of 191k, the last time the average selling price of a terrace was at this value was in 2002....

http://www.home.co.uk/guides/house_prices_...on=oxford&all=1

http://www.home.co.uk/guides/house_prices_...ford&lastyear=1

Finally LL should be aware of the new HMO licence that is now law and means landlords will be fined for breaking it. The law applied if you are renting to more than 4 people accross 3 or more floors in 2 or more families. The landlord will need a licence and inspections, along with other things (a sink in each room). Converting an attic room gives you an extra room, but it also gives you three floors and a bit of a headache when renting the property out. You will only be able to legally rent it to 1 family or less than 4 people.

Hmm perhaps thats why the price of terrace houses seems to have noise dived in oxford, perhaps they have all had the attic converted...... ;p

Edited by moosetea

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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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