BTL dreams go up in smoke

rl290

Why is everyone so hell-bent on gross yields: no one has been talking about net cash yields! E.g.:

Bought at 200k, using a 150k mortgage at 6%
Rented out at 10k per year
Currently worth 150k

I would say that:

Gross yield = rent / price paid = 10/200 = 5.0%

"Current yield" = rent / current price =10/150 = 6.7%
(as pointed out, this is a useless measure as it means that it doesn't matter if you massively overpaid for a property!)

Net cash yield = (rent - mortgage costs - other costs*) / amount invested
= (10 - 6%*150 - other costs*) / 50..... which is about break even
* = service charge, maintenance, EA fees etc


So, in this case, the BTL investor is breaking even in the short term (the net cash yield), and will survive to see long-term gains... the question is when those gains will come.If they take quite a while, he would have been far better off putting his 50k into a savings account!

*******************

To the person who said current yield goes to 0% over time as prices increase / infinity as prices decrease... rent also goes up and down - current rents should stay reasonably constant over time.

stevetodd

rl290 wrote: »

Why is everyone so hell-bent on gross yields: no one has been talking about net cash yields! E.g.:

Bought at 200k, using a 150k mortgage at 6%
Rented out at 10k per year
Currently worth 150k

I would say that:

Gross yield = rent / price paid = 10/200 = 5.0%

"Current yield" = rent / current price =10/150 = 6.7%
(as pointed out, this is a useless measure as it means that it doesn't matter if you massively overpaid for a property!)

Net cash yield = (rent - mortgage costs - other costs*) / amount invested
= (10 - 6%*150 - other costs*) / 50..... which is about break even
* = service charge, maintenance, EA fees etc


So, in this case, the BTL investor is breaking even in the short term (the net cash yield), and will survive to see long-term gains... the question is when those gains will come.If they take quite a while, he would have been far better off putting his 50k into a savings account!

*******************

To the person who said current yield goes to 0% over time as prices increase / infinity as prices decrease... rent also goes up and down - current rents should stay reasonably constant over time.

Rents do not stay constant over time, they rise (they may in the mother of all recessions dip but all things being equal they rise).

I personally feed figures into my spreadsheet to fully analyse, however the gross yield is a good quick way to identify potentially good investments (prior to a full analysis) and secondly definately a good comparative indicator between potential investments.

RomansProperties

rl290 wrote: »

Why is everyone so hell-bent on gross yields: no one has been talking about net cash yields! E.g.:

Personally thats the only part I am interested in
Capital Gains are a bonus but not to be expected within at least the next 10 years.
Every property I own is on an Interest only mortgages apart from my own personal house.
The end of each month we work out the money in and out and whats left is the profits for running the business.
Which is why i stress people should be looking for properties which return as close to 10% as possible

Cleaver

novazombie wrote: »

I like this bit-

and that landlords are offering lures such as free satellite TV and free weekly cleaner in a desperate attempt to secure new tenants.

ha ha

It reminds me of all the house sellers trying things to shift their over priced houses.

Doesn't something like that completely depend on what slant you take? Your view, above, is one.

The other is that business owners are looking at the current environment and coming up with plans to attract new customers or ensure maintaining their current ones. At the end of the day, this is good news for tenants and decent landlords alike. The tenants get a good deal as they get free stuff and decent landlords will understand that they need to do more than just 'rent a house' and go the extra mile.

I guess if you see the doom in everything then you can call it a 'desparate measure by landlords'. Depends on your viewpoint I guess.

Thrugelmir

rl290 wrote: »

Why is everyone so hell-bent on gross yields: no one has been talking about net cash yields! E.g.:

Bought at 200k, using a 150k mortgage at 6%
Rented out at 10k per year
Currently worth 150k

I would say that:

Gross yield = rent / price paid = 10/200 = 5.0%

"Current yield" = rent / current price =10/150 = 6.7%
(as pointed out, this is a useless measure as it means that it doesn't matter if you massively overpaid for a property!)

Net cash yield = (rent - mortgage costs - other costs*) / amount invested
= (10 - 6%*150 - other costs*) / 50..... which is about break even
* = service charge, maintenance, EA fees etc


So, in this case, the BTL investor is breaking even in the short term (the net cash yield), and will survive to see long-term gains... the question is when those gains will come.If they take quite a while, he would have been far better off putting his 50k into a savings account!

*******************

To the person who said current yield goes to 0% over time as prices increase / infinity as prices decrease... rent also goes up and down - current rents should stay reasonably constant over time.

Cash yields are only meaningful at the end of each year or a given period. As there are so many variables that could affect an individual property which can be allowed for but not quantified. Such as unexpected maintenance, rental voids, higher interest costs for example.

stevetodd

RomansProperties wrote: »

Personally thats the only part I am interested in
Capital Gains are a bonus but not to be expected within at least the next 10 years.
Every property I own is on an Interest only mortgages apart from my own personal house.
The end of each month we work out the money in and out and whats left is the profits for running the business.
Which is why i stress people should be looking for properties which return as close to 10% as possible

Where on earth are you finding these 10% yields, I'd say it was virtually impossible (in recent years) to find a 10% yield on a property in London. I suspect that you might be renting out individual rooms to achieve this yield? That's something I would not want to be involved in, it might be more profitable but the input and effort required is also more.

RomansProperties

stevetodd wrote: »

Where on earth are you finding these 10% yields, I'd say it was virtually impossible to find a 10% yield on a property in London. I suspect that you might be renting out individual rooms to achieve this yield? That's something I would not want to be involved in, it might be more profitable but the input and effort required is also more.

We buy property mainly in Leeds.
We dont have any shared houses but Terrace houses which have been converted into flats and studio apartments.
We have these ranging from

13.01

14.48

10.44

10.92

17.87

11.65

19.31

12.42

11.90

8.28

12.78

Returns

stevetodd

RomansProperties wrote: »

We buy property mainly in Leeds.
We dont have any shared houses but Terrace houses which have been converted into flats and studio apartments.


We have these ranging from

13.01

14.48
10.44
10.92
17.87
11.65
19.31
12.42
11.90
8.28
12.78

Returns

Ahh I see I couldn't be bothered converting, not for me, I am happy with what I have and in any case I suspect planning would be an issue in London (mainly due to further sud-dividing and the parking issues)

Cleaver

geoffky wrote: »

Is there one person out there who will admit that they tried btl and found it just not worth the time and effort for the small rewards..

<waves>

Well, I don't think I'll be exactly what you're looking for (as in, I don't regret renting out our house) but I'm happy to admit that I ask myself whether we made the right decision.

I've put our story on here before, but back in 2007 I was offered a new job in a different area of the country, we had a load of savings and we loved our house (just not the area it is in). So we decided to rent it out (we initially bought it in 2004) and buy a flat in the area we currently live. The flat we bought was cheap, so we own around £200k worth of property. So although we have two, they don't add up to as much as what a lot of people on here will have with their one house.

For me, our BTL investment (although I hate that term) is something that will pay for itself, with little or no bother. We have an absolutely brilliant rental company who sort everything out under £300 without even bothering us, we trust them and the situation works great. We plan to mortgage free on both properties when I'm 30 in 2011, so here's my back of a fag packet plan with the property:

(deep breath everyone)

I plan to retire when Im 60. In 2011 we take an interest only 60k mortagage on the BTL property for 30 years. Let's say the average rate we'll pay on this over the 30 years is 6%. The monthly repayment, for the 30 years will be around £365 a month.

However, the 60k will be placed in savings, never to be touched until I retire. Let's say this earns average net interest of 4% for the next 30 years, which will mean I'll have a lump sum of 200k in 2011. I pay back the 60k, so I'll have a lump sum of £140k in 2041.

Our rent at the moment is £600 a month. We don't need this money, so it will cover mortgage and other costs then the rest goes to a savings account. Let's say this rent increases by 3% each year though. So over the next 30 years we'll take in around £35k in rent. We know that my mortgage payment will be around £365 a month for the next 30 years, which adds up to 13k over the 30 years. And let's allow for voids, tax, property maintenance etc. which we'll stick a figure of 20% in for. 20% of the £35k is around 7k. So after the 13k and 7k dededuction I can work out that out of the £rent each month we'll have around £115 'profit' per month in the first month, but this rises every month (the mortgage is 'fixed', according to my fag packet calcs remember) so the profit rises every month, and in 2041 our rent could be around 1.5k a month, our costs around £650 a month, so our profit would be around £850 a month right at the end. We would save all this money, so taking another average interest rate of 4% over the whole 30 years, this 'profit' (after all voids, tax, maintenance etc.) should be around a £204k lump sum once compounded.

Now let's look at the house. Let's say in 2011 it's worth 90k (we bought it for 130k in 2004). Let's have a prefect world and imgaine that house prices rise, on average, 2% a year between 2011 and 2041. This would make the house worth £166k in 2041. We sell it, pay 20% tax (is this right?) and pocket the £130k (hey, what we bought it for!)

Obviously, we've thrown a lot of money at paying off our mortgages before 2011 to make all this happen. So that's 90k of our own money before we even look at the figures above. But we paid off at least 20k of mortgage when we lived there, so it's more like 70k But we've got:

Savings pot from mortgage sum: 140k
Rental profit saved and compounded: 204k
House sale profit: 130k.

Once we've taken to 70k off that we threw at it, we will make £400,000 over the 30 years. For doing nothing. And via an investment that we don't really need. Over the next 30 or so years we'll also have pensions, savings, investments other property that we live in and various other ways of 'making' money. The house can just sit there, do it's thing and we'll see where we are in 2041.

So, after all that, to answer your question Geoff, I sometimes wonder whether we're doing the right thing. I enjoy travel, my friends, my family etc. and have to make a real effort to care about money to be really honest. I like our rental property as I can just sit back and let it do it's thing and we'll see where we are in 2041. Should have maybe sold it in 2007, but we didn't.

Blimey, I've really waffled here haven't I?

confused31_2

I think if you can get a hosue for 50-60000 and rent it out for 500 pound a month, its a no brainer, if i had some spare cash i know what i would be doing and i would be looking for some of these bargains to rent out.

I think the ones who have bought 2006-2007 will be in a bit of a mess, but i think now and hopefully for the next 2 years prices will stay low.

If you can pick up a house for 50,000 and get the rent paid by the government, which is more or less garanteed its a no brainer.