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Rate Of Required Return On Btl

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Having done some basic studying of investment returns v risk as part of my accountancy exams many years ago I remember the Capital Asset Pricing Model. The relevence of this is that as the amount of gearing increases so should the rate of return required increase to reflect the greater risk. If you invest 10% in a BTL a downward correction in price of 20% sees you lose all your investment and leaves you exposed to the debt recovery unit of the lender. Therefore a greater return should be sought if you are very highly geared. From my perspective if I had no borrowing and was buying for cash I would want an overall return of around 7.5% to 8%. If I was 50% geared probably 9.5 to 10% and if 90% geared probably 12%. As we know the rate of reurn of rental income less expenses of management and repairs is around 3%. Therefore the balance must come from capital growth. A long term rate of growth many percentage points greater than inflation or growth in GDP (ie around 2%) is clearly not going to be achievable. So a fairly big fall is imminent. PS remember that many BTL have reasonable size deposits but in many cases this has been borrowed from their principal private residence so they are highly geared. Interested to know what rates of return others would seek in making investment in property. :blink:

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Yup. But even at 7.5% yield that would require roughly a 30% drop in asset value. But i'm sure rents would go up to meet it half way.

BTW, I would expect around 3 percentage points above base rate as a yield, so 4.5 + 3 = 7.5% minimum!

Edit: Oh, and welcome!

Edited by Jason

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You forgot the key phrase the accountancy study guides use in preamble - "rational investor".

Yes your risk -adjusted return calculations are correct in principle, but no investment has more emotion attached (other than perhaps football club shares) than property. It also has the greatest herd mentality and suffers from the false assumption that every house owner knows and understands property economics (in the same way as every adult seems to have an expert opinion on teaching, as they once went to school).

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