6% BTL Yields

[enworb]

I am a btl'er more by accident than choice. I wanted to buy the place but it had tenants.

Basically I will move into it in a couple of years.

It returns a yeild of around 7% but more importantly I will make a tidy profit should I sell it.

The argument that 6% yeilds or there abouts are not worth investing - as rents go up and mortgage repayments stay the same, YoY yeilds will slowly creep up. All this subject to no IR hikes and rents increasing, but if so surly 6% is worth it in the long run.

Regardless of your opinion of LL's morals, do you really all believe a 6% yeild is not worth the hassle when in 10 - 20 years time it would probably make them a fortune.

[FreeFall]

Why should rents start rising with inflation ? - they havent for years.

Partially true. In the late 80's I was paying 300 pcm for a room in a shared house in Manchester. Going rate now I believe is around 400pcm. 33% increase in 15+ years - well below inflation though?

[Levy process]

I am a btl'er more by accident than choice. I wanted to buy the place but it had tenants.

Basically I will move into it in a couple of years.

It returns a yeild of around 7% but more importantly I will make a tidy profit should I sell it.

The argument that 6% yeilds or there abouts are not worth investing - as rents go up and mortgage repayments stay the same, YoY yeilds will slowly creep up. All this subject to no IR hikes and rents increasing, but if so surly 6% is worth it in the long run.

Regardless of your opinion of LL's morals, do you really all believe a 6% yeild is not worth the hassle when in 10 - 20 years time it would probably make them a fortune.

I wouldn't be surprised if rents have to fall with rising inflation. At the moment it is goods that are inflating, not wages, so people will be cutting back. You could be in for financial pain.

Edited June 12, 2006 by Levy process

[non-FTBer]

In 2001 I was paying £600 a month for a 1 bed flat with open plan kitchen/living area.

In 2006 I am paying £625 a month for a 2 bed flat with separate kitchen, huge rooms, double bedrooms, en-suite.

If that is rents rising then pigs must be flying.

[Bear Goggles]

All this subject to no IR hikes and rents increasing...

Rents seem to be very closely correlated with wage inflation. If there is increasing wage inflation there will be IR hikes.

[Immigrant]

I am a btl'er more by accident than choice. I wanted to buy the place but it had tenants.

Basically I will move into it in a couple of years.

It returns a yeild of around 7% but more importantly I will make a tidy profit should I sell it.

The argument that 6% yeilds or there abouts are not worth investing - as rents go up and mortgage repayments stay the same, YoY yeilds will slowly creep up. All this subject to no IR hikes and rents increasing, but if so surly 6% is worth it in the long run.

Regardless of your opinion of LL's morals, do you really all believe a 6% yeild is not worth the hassle when in 10 - 20 years time it would probably make them a fortune.

As Dr Bubb says, rents don't have to rise with inflation. There are other factors involved such as supply and affordability.

But I do see your point that sooner or later rents will rise if we have sustained inflation, and then the yield will improve. The thing is that while you are waiting for the yield to improve you are paying an opportunity cost - there are better investments you could be making with your money.

I am in the same boat in a way as I bought my house to live in (and as a long-term investment) but am currently living abroad and it may be many years before I go back to the UK. I have about £50K equity in the property, which is currently being let at a net loss of about £100 month (taking into account the letting agent's fees etc). This is a crazy "return" on my £50K - I'm sure Dr Budd and others would think I am nuts to hang on to the house under present conditions, with significant price rises looking unlikely and a correction or even crash being a distinct possibility.

But I have no plans to sell and it would take quite a big hike in interest rates to make me consider it. I wouldn't even know how to go about buying shares and the stock market scares me. It seems very volatile in comparison to property. Property can go down, agreed, but it will never lose its value whereas companies can go bust and disappear completely. In the LONG TERM, I do believe that property will always go up (cue laughter and disbelief). I'm also very far away and very busy, so I just can't be bothered to sell and incur hassle and transaction costs and the anxiety of watching the stock market go all over the place. I'd also want to buy into the UK market again at some point, so there would be more transaction costs, hassle, anxiety about timimg the market etc.

I suppose my investment strategy (if you could call it that) is to go for low returns, low risk on property (in the LONG TERM, please note) rather than the higher risk, higher returns on shares. If it hadn't been for this site, I don't think I would have realised that there is an opportunity cost (unbelievable as that may sound to a lot of you).

Call me an idiot, or treat this as an insight into the BTL mind, but that's the way I am thinking. Or persuade me that I really am mad and it would be worth the hassle etc of selling and investing my equity elsewhere. (I couldn't MEW to get funds to invest as Magpie has suggested on other threads, as I'm not resident, employed etc at the moment).

Like Enworb, I am waiting for inflation to help me out and increase the rent. My house BTW is in a good area and is very nice as I lived in it myself and had it renovated to a high standard (probably the main reason my yield is so poor), but it is easy to let and I don't expect many voids or repair bills.

[non-FTBer]

Call me an idiot, or treat this as an insight into the BTL mind, but that's the way I am thinking. Or persuade me that I really am mad and it would be worth the hassle etc of selling and investing my equity elsewhere. (I couldn't MEW to get funds to invest as Magpie has suggested on other threads, as I'm not resident, employed etc at the moment).

Like Enworb, I am waiting for inflation to help me out and increase the rent. My house BTW is in a good area and is very nice as I lived in it myself and had it renovated to a high standard (probably the main reason my yield is so poor), but it is easy to let and I don't expect many voids or repair bills.

If you expect to return to live there at some point then it isn't neccessarily stupid as you will save the transaction costs of selling then buying again.

If you sold now, then invested in stocks, then sold stocks, then bought a house then you would have to pay a massive amount of transaction costs both for the house buying/selling and the sotcks buying/selling.

So it would depend on how long you will not be resident there.

I really wouldn't rely on rents rising to cover your deficit IMHO, as I expect the following:

• Increase in Interest Rates

• Low wage inflation

• High consumer price inflation (ignore CPI)

This effectively reduces the spending power of people who might rent your property as their cost of living (electric bills, gas bills, petrol, food, taxes, etc) all increase more than their wages do.

This will keep rents low, or at the very least constrain inflation of rents.

Couple this with an increase in your costs due to higher IRs making mortgage repayments higher (if you have not got a fixed mortgage) and its not looking good from an 'investment' perspective.

I don't think you can make an educated decision until you know:

• Where you think house prices will go

• How long you will be away before returning to the UK

[Portent]

I have no idea what my LL's yield is but I suspect he probably isn't making much of a profit at all (I know roughly what the place is worth and the rent is substantially cheaper than the current price and still cheaper than the price he actually bought it for according to nethouseprices). And I've just called up the agent to get them to send round an electrician and a plumber to fix a couple of problems. He won't be making a profit this month.

I've renovated a house in the past, doing most of the work myself, including electrical work and plumbing so I know I could fix these issues. But one of the biggest advantages of renting is being able to call the agent and get them to send round some workmen at someone elses expense

[right_freds_dead]

6% is fine as at the end of the 25yr term you have an asset that someone else paid for. any yield is acceptable.

trouble is if the IR rises you end up taking a loss. often a huge loss.

can you ride out 10 years of -5% yields ?

[Charles_Darke]

6% is fine as at the end of the 25yr term you have an asset that someone else paid for. any yield is acceptable.

trouble is if the IR rises you end up taking a loss. often a huge loss.

can you ride out 10 years of -5% yields ?

Well, one way of looking at it might not be in terms of negative yields, but in terms of paying say £2,000 a year (or whatever) and getting a £250,000 house at the end of 25 years mostly paid for by your tenant.

[starship fighter]

every time i move house i am able to secure an equivocal property for less money. this has been the pattern in sheffield for at least 6 years now. if the landlords in certain areas were to put their rent up, they might as well simply forget it; there will be something cheaper somewhere, and this isn't going to change as they universities develop more and more bespoke student accommodation leading to the release of more and more traditional housing (ie terraces etc.) onto the market.

[enworb]

Well, one way of looking at it might not be in terms of negative yields, but in terms of paying say £2,000 a year (or whatever) and getting a £250,000 house at the end of 25 years mostly paid for by your tenant.

These days a 7% yeild return is very unlikely with a repayment mortgage.Only with interest only mortgages.

The LL would only make the difference between the purchase price and the sale price, subject to CGT, allowable profit of around £9K a year.

Still a very good return in my eyes but tenants paying for a repayment mortgage rarely happens these days.

[Magpie]

I suppose my investment strategy (if you could call it that) is to go for low returns, low risk on property (in the LONG TERM, please note) rather than the higher risk, higher returns on shares. If it hadn't been for this site, I don't think I would have realised that there is an opportunity cost (unbelievable as that may sound to a lot of you).

Call me an idiot, or treat this as an insight into the BTL mind, but that's the way I am thinking. Or persuade me that I really am mad and it would be worth the hassle etc of selling and investing my equity elsewhere. (I couldn't MEW to get funds to invest as Magpie has suggested on other threads, as I'm not resident, employed etc at the moment).

To be fair, that suggestion is more of a thought experiment than a serious suggestion for the current climate. The point of it is to try and counter the idea that STR has already been proved successful because "property is boring", by pointing out that the motivation of the STR decision was really a belief that prices would fall. It's more of a stick to poke Dr Bubb with and even then it's a bit of an unfair rhetorical device, as it relies for its effect on saying "imagine you'd known for sure that prices wouldn't fall".

I think you make an important point about going for "low risk, low returns". The future is uncertain, but it's a fair bet that property will have some value, so for those who don't want to (or don't feel confident to) get into gambling on gold, shares, and other investments, why not stay in property?

My basic point with the MEW theory was really to try and counter this idea that, simply because you could theoretically make more money elsewhere, there is some kind of moral imperative to get out of property and into a more profitable asset class. For many people there are other things to do with life than learning to understand and religiously follow the markets. Bubb has probably made plenty of money, but it seems that a few others here have lost a bit of money on the recent gold and SM falls. There are no guarantees in any asset. For those who are happier with the lower risk strategy, property is a boring, but relatively safe place to have some money. Personally I don't have a huge amount of equity in my house. I don't have the inclination to gamble it elsewhere, but if I did I'd be pretty reluctant to either take all the equity out, or to take the even greater risk (to my mindset) of selling up and trusting that future events would allow me to buy back.

Edited June 12, 2006 by Magpie

[dog]

I am a btl'er more by accident than choice. I wanted to buy the place but it had tenants.

Basically I will move into it in a couple of years.

It returns a yeild of around 7% but more importantly I will make a tidy profit should I sell it.

The argument that 6% yeilds or there abouts are not worth investing - as rents go up and mortgage repayments stay the same, YoY yeilds will slowly creep up. All this subject to no IR hikes and rents increasing, but if so surly 6% is worth it in the long run.

Regardless of your opinion of LL's morals, do you really all believe a 6% yeild is not worth the hassle when in 10 - 20 years time it would probably make them a fortune.

I rent a family home and these are much cheaper to rent than buy. My landlord makes approximatly 2.86% (after costs and agents fees) from my rent.

My impression is that the rental market is getting softer. My landlord has decided to put the house on the market. Having looked around, I believe our next place will be 10-15% cheaper than this one. I also suspect that the glut of new flats being bought up by property investors is going to hammer the rents at the cheaper end of the market in some parts of the country.

Edited June 12, 2006 by dog

[enworb]

A friend of mine has had an offer accepted on a house (full asking price because it's in a nice area) and all was going well until he found out the buyer of his penthouse is doing so as an investment.

I know for sure that there are opportunites for property investments but he wants to buy a penthouse for £450k and rent it out.

Assuming he gets a 5% IO mortgage, he would need to get £1875 for a 0% yeild. Personally I don't think he would, and any gaps between tenants would be very expensive. Because he can only get 85% LTV it is a requirement that the penthouse is valued at £470k because he can only borrow £400k.Basically unless his lenders value it at £470+ he cannot buy it and so my friend will not be able to buy the house he wants.

I know there are Londoners on this site that would snap up a penthouse for £450k but to the rest of us a detached house has would make more sense as an investment or as a family home.

At £450k it can't possibly appreciate much because of the stamp duty threshold at £500k so how can it be an investment.

[Immigrant]

I am in the same boat in a way as I bought my house to live in (and as a long-term investment) but am currently living abroad and it may be many years before I go back to the UK. I have about £50K equity in the property, which is currently being let at a net loss of about £100 month (taking into account the letting agent's fees etc). This is a crazy "return" on my £50K - I'm sure Dr Budd and others would think I am nuts to hang on to the house under present conditions, with significant price rises looking unlikely and a correction or even crash being a distinct possibility.

But I have no plans to sell and it would take quite a big hike in interest rates to make me consider it. I wouldn't even know how to go about buying shares and the stock market scares me. It seems very volatile in comparison to property. Property can go down, agreed, but it will never lose its value whereas companies can go bust and disappear completely. In the LONG TERM, I do believe that property will always go up (cue laughter and disbelief). I'm also very far away and very busy, so I just can't be bothered to sell and incur hassle and transaction costs and the anxiety of watching the stock market go all over the place. I'd also want to buy into the UK market again at some point, so there would be more transaction costs, hassle, anxiety about timimg the market etc.

I suppose my investment strategy (if you could call it that) is to go for low returns, low risk on property (in the LONG TERM, please note) rather than the higher risk, higher returns on shares. If it hadn't been for this site, I don't think I would have realised that there is an opportunity cost (unbelievable as that may sound to a lot of you).

Call me an idiot, or treat this as an insight into the BTL mind, but that's the way I am thinking. Or persuade me that I really am mad and it would be worth the hassle etc of selling and investing my equity elsewhere. (I couldn't MEW to get funds to invest as Magpie has suggested on other threads, as I'm not resident, employed etc at the moment).

Like Enworb, I am waiting for inflation to help me out and increase the rent. My house BTW is in a good area and is very nice as I lived in it myself and had it renovated to a high standard (probably the main reason my yield is so poor), but it is easy to let and I don't expect many voids or repair bills.

Nobody has given any arguments why I should sell and invest elsewhere - just the usual "ha-ha you think property always goes up" stuffl. Some of you have been quite complementary about my "strategy" - I may be subsidising my tenant a bit but I will own the property outright in due course so it is an investment, to my mind a low-risk, low-return, low-hassle one.

I won't be selling - not unless my personal circumstances change.

[erd]

Yields will rise when prices fall as yield is based on current price!