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Valuation By Rental Yield


dr ray
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I can only see one issue with them using purchase price when discussing yield, & that is it wouldn't allow comparison with other possible investments at this point in time (if they wanted to switch). However, don't see anything wrong with using it as a figure for yield.

No, it's not just useful for comparison with other assets, it is primarily a tool for valuation. If you know that market yields are 2 percent below interest rates, you ought to know that real estate is expensive and that you should be selling it. If you bought when yields were higher and rentals haven't really moved (as they didn't between 2003 and 2007), then you would be realising that profit by selling. For example, imagine you bought a 100k house and were getting 5k que per annum rental - a yield of 5 percent. Then the value of your house moves to 150k, with rentals unchanged. The market yield of your house is now 3.33 percent, even if you are still getting 5 percent. It makes sense to sell, realise the 50k profit and put the money into something else (all other things being equal).

Heck, using running yield as you suggest, if the value of the property went down then their yield would go up even though this isn't realisable to them.

Onc again, one should look at market yields to value the rental, not the yield one has currently. When you buy a stock you do not look at the price you bought it at to value it, and nor should you with a house. As for what is realisable, however, the investor can realise the change in yield you speak of simply by buying another house and letting it out.

Wouldn't the best yield for them to use be what would be realised if the asset were disposed of now at current market price?

Yes - rental against the current market price is the best measure, which was my original point...

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Would he use the rule to value the following properties.

House A, is in a quiet village in Kent. A very appealing looking (external) 2 bedroom property with a mature garden, its structurally sound, has double glazing, central heating a decent kitchen and bathroom. However the décor is dated and doesn't fit in with modern standards.

House B, is in the very next street, its exactly the same size as property A. It too is structurally sound, has double glazing, central heating a brand new kitchen and bathroom. It also benefits from modern décor of the highest taste. However it's a 1970's architectural nightmare with lots of wood cladding, the garden is a tarmac drive to the front and a paved area to the rear (looks crap, but easy to maintain).

They both have a rental value of £550 per month. House A is clearly the better property but perspective tenants are put of by the décor and don't want to spend time and money updating, only for the owner to benefit. House B is ready to move straight into and there's no need to do any gardening, it looks crap from the outside but who cares your only renting.

Are these properties worth the same amount?

You are getting confused between "rule of thumb" and more in depth considerations.

Rule of thumb is just a starting point.

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The % on my STR house is 3.4% ie 29 x !!!!!!

Landlord doesn't care since he bought it was a repossession in 1991 for 1/5 of its "current" value.

well, your landlord is an idiot. if s/he sells and puts money to the bank s/he would get 6%

and if s/he buys again after 4-6 years s/he would double/triple the portfolio ...

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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.

I would not do it for 10% ...

6% capital costs, 1% voids, 1% maintenance costs; 1% agent fees + insurance costs

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if the rent is 600pm I would make about 60 quid a month .... is it worth it without any capital apprication for next 5 years ????

not for me ....

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I would not do it for 10% ...

6% capital costs, 1% voids, 1% maintenance costs; 1% agent fees + insurance costs

-------------------------------------------

if the rent is 600pm I would make about 60 quid a month .... is it worth it without any capital apprication for next 5 years ????

not for me ....

But you are assuming no asset appreciation. This is true at present and with expected further property deflation one would be an idiot to buy now to rent out and hope to make a profit but in normal times there is asset appreciation - roughly in line with wages historically. On average the capital cost (which you have put at 6%) is balanced by asset appreciation so the yield break even is much lower.

The point was made earlier that sticking to these higher yield figures of 10-12% imposes a discipline to only buy when prices are below trend so guarantees capital appreciation. The snag is that the opportunity probably only arises once in 15-20 years (but we may be within a year or two of that now).

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