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Valuation By Rental Yield


dr ray
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I know it has been discussed before but the rules of thumb I have seen for working out the value of a rental property give figures which differ by up to 100%

What system do the folk on here favour when working out how much a property is worth from its rental value.

What is considered an acceptable long term rental yield by professional landlords?

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I know it has been discussed before but the rules of thumb I have seen for working out the value of a rental property give figures which differ by up to 100%

What system do the folk on here favour when working out how much a property is worth from its rental value.

What is considered an acceptable long term rental yield by professional landlords?

The trouble with this is that there is no such thing as a long term rental yield in the same way as a bond yield, as we hve no idea what future rental returns will be. However, we can work out roughly what a current rental yield should be. Take current mortgage interest rates - some kind of tracker would probably be best, and then add spreads for credit risk, maintenance, voids etc. A few years ago, when mortgage rates were at about 5% (probably not far off here), I worked out a fair value for rental yields of about 8%. Of course, none of the "professional landlords" on HouseMouse or Singing Pig at the time agreed, because they were only getting 3% (they thought they were getting more because they were, moronically, comparing rentals to their original purchase price, not the current market price, of their properties).

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10 - 12 % yield does seem opimistic to me. Might be possible with multiple rentals in a student house but then this is needed to compensate for the hassle and repairs.

I'm trying to leave the unusual situation of falling house values out of the calculation. In the long term houses increase in value roughly in line with wages so 3-4% on top of this after allowing for voids would seem reasonable to me. This wouldn't cover a mortgage and you would do better in a building society in the first couple of years but any business takes time to get into profit.

Any thoughts?

I don't want to sound like a troll but at some stage I think some people on here would want to BTL and holding out for 12% starting yield may not be realistic.

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10 - 12 % yield does seem opimistic to me. Might be possible with multiple rentals in a student house but then this is needed to compensate for the hassle and repairs.

I'm trying to leave the unusual situation of falling house values out of the calculation. In the long term houses increase in value roughly in line with wages so 3-4% on top of this after allowing for voids would seem reasonable to me. This wouldn't cover a mortgage and you would do better in a building society in the first couple of years but any business takes time to get into profit.

Any thoughts?

I don't want to sound like a troll but at some stage I think some people on here would want to BTL and holding out for 12% starting yield may not be realistic.

Immigration and a depression will put paid to your theory that wages will be going up and even if they somehow many 2-3% then don't you think that the tax rises to pay for the bank bailout will ensure this rise is eaten up.

Don't fool yourself houses are well over priced what ever way you look at it.

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The mystery to me is why more landlords were not selling up when current yields dropped well below 5%. Did they not notice this sign? Sure some stopped adding, but few seemed to have sold.

Anyone?

And if they didn't sell into this peak, what exactly is the BTL exit strategy?

Anyone?

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The mystery to me is why more landlords were not selling up when current yields dropped well below 5%. Did they not notice this sign? Sure some stopped adding, but few seemed to have sold.

Anyone?

And if they didn't sell into this peak, what exactly is the BTL exit strategy?

Anyone?

My colleague does BTL and I had a chat with her earlier this week.

She felt that as long as she was covering her mortgage payments she was not interested in the rental yield as she would make money on capital appreciation. :huh: She didn't have a mortgage for the full value and bought over the last 5 years so is still just about covering outgoings.

I suspect this is the reason people didn't sell as yields dropped

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My parents, who had two 1930s purpose built flats (not BTLers, they inherited them years ago) with zero mortgage packed it in when the yield dropped below 10% as, once all other costs were taken into account, they produced about the same income as just chucking the proceeds of the sale in the bank for a lot more hassle.

The last part of that is key, as the calculation isn't so much an absolute value, as a comparison with sticking the money somewhere else.

Or, to put it another way, "it depends".

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My parents, who had two 1930s purpose built flats (not BTLers, they inherited them years ago) with zero mortgage packed it in when the yield dropped below 10% as, once all other costs were taken into account, they produced about the same income as just chucking the proceeds of the sale in the bank for a lot more hassle.

The last part of that is key, as the calculation isn't so much an absolute value, as a comparison with sticking the money somewhere else.

Or, to put it another way, "it depends".

BTL has only ever been worth the hassle with leverage....

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I would say monthly rent x 12 x 10 years. 600 x 12 x 10 = 72,000. Is how a pro landlord I know works, and he hasn't purchased any property since 2001.

This is the formula I have seen before.

In Hereford a 3 bed house in a decent area would rent for £600 or less and currently costs around 170-200k. Although I think Hereford is overpriced even the most pessimistic bear cannot really believe that they would drop to 72K or that rents would go up (down more likely as jobs are lost).

This would suggest that either there should be no rentals in Hereford or the figures are wrong

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10 - 12 % yield does seem opimistic to me. Might be possible with multiple rentals in a student house but then this is needed to compensate for the hassle and repairs.

I'm trying to leave the unusual situation of falling house values out of the calculation. In the long term houses increase in value roughly in line with wages so 3-4% on top of this after allowing for voids would seem reasonable to me. This wouldn't cover a mortgage and you would do better in a building society in the first couple of years but any business takes time to get into profit.

Any thoughts?

I don't want to sound like a troll but at some stage I think some people on here would want to BTL and holding out for 12% starting yield may not be realistic.

in that case invest in something else. BTL is not a magic asset class, if the numbers don't work, don't do it.

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You can’t, and its as simple as that.

Would you like to expand on that.

This is the formula I have seen before.

In Hereford a 3 bed house in a decent area would rent for £600 or less and currently costs around 170-200k. Although I think Hereford is overpriced even the most pessimistic bear cannot really believe that they would drop to 72K or that rents would go up (down more likely as jobs are lost).

This would suggest that either there should be no rentals in Hereford or the figures are wrong

Why can't houses in Hereford fall to £72000; what's the average local income?

I started a thread a few months back which looked at the earnings per share of quoted companies and tried to adjust that to get a required yield. In the end I came to 12% which confirmed the old rule of thumb of 1 month's rent = 1% of value although to be fair i'm not sure it would stand up to academic scrutiny.

I think that 10% is probably about right, 8% is an absolute minimum and already into bubble territory, sub 5% is so far gone as to be crazy. Don't be surprised if we're up to 12% by the end.

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This is the formula I have seen before.

In Hereford a 3 bed house in a decent area would rent for £600 or less and currently costs around 170-200k. Although I think Hereford is overpriced even the most pessimistic bear cannot really believe that they would drop to 72K or that rents would go up (down more likely as jobs are lost).

This would suggest that either there should be no rentals in Hereford or the figures are wrong

I am not the most pessimistic bear, but I truly believe that prices may well drop that far.

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The value of a house is not in any way governed by its actual or potential rental yield - never has been and never will be.

Ok, that's just denying reality.

The value of the house is the value of the future housing services which it provides, discounted to allow for the time value of money. Rents are a close approximation to the value of the housing services so the key factors affecting the value of the house are the rents (housing services) and the required yield.

As mentioned by other posters, "professional investors" really do use this method.

Of course the price of the house can vary widely due to the sort of mania that has pumped up the current bubble but the underlying value should remain reasonably stable.

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I am not the most pessimistic bear, but I truly believe that prices may well drop that far.

You may be right but that would be a huge drop as I am already taking 10-15% off peak.

I'm not looking at investing at these prices - I am just trying to get opinion on fair value based on rent. I posted a while back that I had looked at BTL in Hereford in the early 90s and even then I couldn't make the figures add up and I never did it. Prices went up more than 3 fold after that (although rents hardly changed).

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Ok, that's just denying reality.

The value of the house is the value of the future housing services which it provides, discounted to allow for the time value of money. Rents are a close approximation to the value of the housing services so the key factors affecting the value of the house are the rents (housing services) and the required yield.

No the value of a house is what the markets highest bidder is willing/able to pay.

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Ok, that's just denying reality.

The value of the house is the value of the future housing services which it provides, discounted to allow for the time value of money. Rents are a close approximation to the value of the housing services so the key factors affecting the value of the house are the rents (housing services) and the required yield.

As mentioned by other posters, "professional investors" really do use this method.

I know a fair few that don’t and no one who does.

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No the value of a house is what the markets highest bidder is willing/able to pay.

Incorrect IMO: the cost of a house is what the markets highest bidder is willing/able to pay. That is why we had a bubble. The cost exceeded the value.

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Incorrect IMO: the cost of a house is what the markets highest bidder is willing/able to pay. That is why we had a bubble. The cost exceeded the value.

What was the value then?

…from your first post: “I know it has been discussed before but the rules of thumb I have seen for working out the value of a rental property give figures which differ by up to 100%

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