Investment Property - What calculation tools do I need?

leboof

Hi

I know I'm going to get a flood of "Not the time to Buy" replies here, but I'm thinking of buying a property as prices are very low at the moment.

What tools can I use to compare different properties to figure out the best option financially? Obviously house price, rental income, taxes and perhaps projected house prices if I were to sell in 5,10,15 20 years (tricky I know).


Thank you in advance for any replies.

poppysarah

Why are you buying it? As a long term investment? As a pension? For ensuring all your eggs aren't in one basket? For short term kudos? For the joy of being a landlord?

anotherpaul_2

leboof wrote: »

... projected house prices if I were to sell in 5,10,15 20 years (tricky I know).

I would suggest that anyone who says they can predict that with any useful degree of certainty is one of deluded, lying or very, very, rich. Of course, I'm a natural cynic.

Doozergirl

You're looking for the rental yield. You can't predict house prices but if your yield is high enough you will end up with a property paid for in the majority by someone else.

Calculating the yield levels the playing field in terms of the price of the house and the rent you will get and finds you simply the one with the best return.

Multiply the realistic monthly rental income by 12 to get the amount you receive per year.
Then divide that by the price of the house.
Then multiply that by 100. That gives you your % yield. Compare it to your mortgage rate and you see how much more you would make than that.

eg. The yield on a house worth 200k renting out at 750pcm would be 4.5% = rubbish.

You really want above 7.5%. Prices have moved but I think it's hard to find much more than that without letting rooms separately. Smaller properties produce a better yield than larger ones! Do the maths and you'll see.

leboof

poppysarah wrote: »

Why are you buying it? As a long term investment? As a pension? For ensuring all your eggs aren't in one basket? For short term kudos? For the joy of being a landlord?

All of the above!

m_13

I can recommend 'Successful Property Letting: How to Make Money in Buy-to-let ' by David Lawrenson.

He has a chapter on finding the right property to buy and also information on calculating yields. In fact, he says that it's too simplistic to calculate yield against the BTL mortgage payment as there are lots of other costs like buildings insurance, service charges (on leasehold properties), gas certificates, electricity certificates and letting fees.

I've found his book to be extremely helpful and informative.

leboof

Doozergirl wrote: »

You're looking for the rental yield. You can't predict house prices but if your yield is high enough you will end up with a property paid for in the majority by someone else.

Calculating the yield levels the playing field in terms of the price of the house and the rent you will get and finds you simply the one with the best return.

Multiply the realistic monthly rental income by 12 to get the amount you receive per year.
Then divide that by the price of the house.
Then multiply that by 100. That gives you your % yield. Compare it to your mortgage rate and you see how much more you would make than that.

eg. The yield on a house worth 200k renting out at 750pcm would be 4.5% = rubbish.

You really want above 7.5%. Prices have moved but I think it's hard to find much more than that without letting rooms separately. Smaller properties produce a better yield than larger ones! Do the maths and you'll see.

Thank you. Great, I've done the figures on the 3 I'm interested in....

4.43%
5.23%
4.80%

... and yes, the cheaper the property, the higher the yield even given the smaller rental income.

Doozergirl, you seem to know what you are talking about. Could you answer 3 questions please? Or anyone else for that matter.

So, why in your example is 4.5% rubbish? Is this because there are simpler ways of investing the money and gaining a better return? Perhaps, but if I have to get a mortgage for these properties and don't have the cash to invest, then I can not compare other investment rates. So maybe 4.5% is therefore reasonable.

Another point. As interest rates are low, a mortgage is currently way below what I'd receive in rental. Great, but when it goes up, profits are smaller. Any way of taking this into acount?

Thirdly, I am hoping that the market will recover over time and gain more profit from a sale. Should I ignore this and work simply on yield?

Thank you all for your replies. Truely appreciate it.

getmore4less

Short term is property speculation

Long term is a business.

For the long term you need a calcualtor to work out the gross yield and make a guess at net yield.

The place has to stack up on it's own cash flow anything else is icing.

Aim for gross yields of 10%, rates will not stay low forever, and 10% gross gives a reasonable net return on capital long term.

PasturesNew

Most professional landlords wouldn't touch a yield of less than 10%.

10% gives you leeway if you have to drop the rent to get a tenant, if you have voids, it covers problems - and it covers higher interest rates when they go up.

A 4.5% yield is more likely to more often be finding you having to put your hand in your own pocket each month ... not easy if you lose your job.

Doozergirl

leboof wrote: »

So, why in your example is 4.5% rubbish? Is this because there are simpler ways of investing the money and gaining a better return? Perhaps, but if I have to get a mortgage for these properties and don't have the cash to invest, then I can not compare other investment rates. So maybe 4.5% is therefore reasonable.

Another point. As interest rates are low, a mortgage is currently way below what I'd receive in rental. Great, but when it goes up, profits are smaller. Any way of taking this into account?

Thirdly, I am hoping that the market will recover over time and gain more profit from a sale. Should I ignore this and work simply on yield?

Thank you all for your replies. Truely appreciate it.

I agree with Pastures New as well, at 4.5% you're making a loss. If you are taking out a mortgage now, BTL then regardless of the base rate being 1%, you'll still be paying more than that, interest only and as soon as you have an empty month, you're paying for it.

You want a repayment mortgage - there's no question in my mind right now that if you're BTL now then you're in for the long term. You really need to be looking at this to pay it's way otherwise you're in danger of seeing this investment go the way that many BTLs have gone - to repossession

When working out what you can afford you can't include price rises in the equation. If after 25 years you have a house paid for by someone else that's mission accomplished - why not do the proper homework now rather than rely on house prices? A higher yield sees you pulling less from your pocket and more money, regardless of what house prices do when you come to sell.

Why take a low yield when if you look hard enough you can spend the same and end up with more? House prices will do what they do. Buy well to start off with and you will only end up better off.

It's incredibly naive to buy with a loss making yield and hope for capital gains. Many people are seeing their lives shattered because they didn't do enough homework.

2912pwil

Call me simple but... when we don't know what the property market will do or, more important the economy as a whole... (if it takes a real down-turn anything could happen eg people moving back in with mummy & collapse of rental rates..) then, in answer to your original question....

"
What tools can I use to compare different properties to figure out the best option financially?

"
a Crystal Ball...

and, as you will already know, thing about Crystal Balls - you get very little Crystal & and awful lot of ****s...

Good luck!