Estimate right property price based on rent yield

sebtomato

Hi,

I am trying to buy a 1 bed flat, and looking for the proper price to offer. I have looked at the various web sites online for historical prices, similar properties sold etc.

However, I am wondering also if I should consider the possible rent for the flat, as an indicator of price.

I am renting a flat currently, and the annual yield for the owner is currently around 4%, based on property price, rent paid and service charged deducted. I have been renting for 5 years, and the rent was never increased, so the return on investment as probably been dropping a lot.

Is this a good or bad yield for rental?

The property I am trying to buy would have a yield of 4.42% if I was paying for the asking price, and based on flat for rent in the same building or street. I think it would be easy to rent giving the quality of the building, flat and location.

Thanks,
Seb

seabright

If you're buying the flat to live in yourself, I wouldn't consider the yield, I'd consider:
- do I love it?
- do I want to live there?
- is the price they're asking fair? (You've already researched this)
- can I afford the mortgage I'll need to buy it?

If yes to all the above, by all means offer a bit less, buy I've you're buying a home I think you have to use different criteria than if you're buying an investment property.

sebtomato

Sure, but I would like also to know, given the rent charged in the same building/street, how to calculate the expected property value from an average/reasonable yield.

This is to confirm that I am paying a proper price, and also that I can rent the flat if I need to move suddenly.

The asking price is a bit high, based on my research, so my offer is currently 11% less, and it would bring the yield to about 4.75% per year.

Fire_Fox

You would need consent to lease from the lender, so a theoretical yield may remain theoretical! 4% doesn't sound great to me since you need to factor income tax and many other costs into the equation, not only service charges. Note that service charges on new build/ newly converted properties have a nasty habit of increasing massively in the first few years.

bitsandpieces

Are you looking for a flat to live in, or to rent out as a business. If the latter, you'll need to work out whether the yield will make it worthwhile (4% seems low, if that's what you're planning). If you're wanting to live there, there are lots of other things to consider.

Rents as a percentage of property value vary in different areas and for different types of property and rentals. If rents are relatively low as a percentage of value, that can make renting rather than buying more attractive - though there are plenty of other reasons why you might want to buy.

sebtomato

Fire_Fox wrote: »

4% doesn't sound great to me since you need to factor income tax and many other costs into the equation, not only service charges.

OK. What would be a good yield for a residential flat in a modern building, in a gated development, in greater London (8 min walk to the underground station)?

Thanks,
Seb

Fire_Fox

I am no expert but for me ... anything that's significantly better than predicted interest rates over the next few years; you won't have to invest much effort to put your money into bonds or regular savings accounts but there is a lot of work involved in being a landlord! Note that the figures below are for BTL mortgages, you'd be on a residential mortgage so really your yield should be higher:


"October 2009: New data from Landlord Mortgages, the UK’s largest specialist buy-to-let broker, reveals that rental yields are showing signs of recovering from their long-tern downward spiral. Rental yields in Scotland have increased by 0.45% over the last quarter (from 5.85% in Q2 to 6.03% in Q3), increasing the gap between Scottish yields and the rest of the UK to 0.61%. Yields in England stabilised over the last quarter, remaining at 5.45%. London was the only region to see a continued downward spiral in yields, falling to 5.25% (5.38% in Q2)."
http://www.buytoletmortgages.co.uk/

jfed

I think that residentail purchase price and investment purchase price are to be taken completly seperatly as the justification criteria for purchase are completly indipendent. For a buy2let property the only consideration is can you make it stack up on a rental basis. In todays market often the criteria are set by the lenders Ie can you get 125% rental income to mortgage payment etc. However if you are buying the product you are going to use is different and most lenders will offer you a greater loan to value as such purchase price is more dependent on how much you want to live there. Also worth baring in mind is that if you intend to rent the property you will need to let your lender know and make sure your insurance policy is upto date.

missile

There are a great many unforseen expenses which can catch out a newbie BTL investor. Ignoring those, for example you might buy a property for say £200,000 and let it for £1,000 per month deduct 20% for voids, agent fees maintenance etc would yield a return of 4.8% before tax.

In the past LLs have seen growth in the property which boosted the return on their investment. You can +/- whatever you think appropriate for property escallation in your area.

I would consider anything less than 7% return is not worth the risk / hassle.

theartfullodger

I am renting a flat currently, and the annual yield for the owner is currently around 4%, based on property price, rent paid and service charged deducted.

Is this a good or bad yield for rental?

The property I am trying to buy would have a yield of 4.42%

Ho ho ho....

The last time the Conservatives came to power interest rates hit 17% with 9 months and stayed around/above 10% for several years... assuming you need a mortgage... in similar circumstances what yield would you require???

Thatcher came to power 5th May 1979...

BoE Interest rates (Historical..) are recorded here...
http://www.bankofengland.co.uk/mfsd/iadb/Repo.asp

& hit 17% (s-e-v-e-n-t-e-e-n p-e-r-c-e-n-t) on Thu, 15 Nov 1979..

Interest rate dropped to
9.38%
on
Tue, 12 Oct 1982 but didn't stay below 10% until
Tue, 05 May 1992
(exactly 13 years after Thatcher got power..), some time after Thatcher had been kicked into touch...

It is one of the mysteries of the universe to me why so many people consider Thatcher admirable when that (interest rates so high) was going on, as well as crime rising (oh, yes) and unemployment up also...

You will note that for 12 year interest rates were very largely above 10%. In the unhappy circumstance that a similar pattern occurred (I know, I know,,, I have a sums degree...) then almost any fabbo wonderful fixed-interest deal would be well-overtaken and the shock & awe of the realities of "interesting" high interest-rate payments would hit the house-purchasing punter...

Ho hum, what a price to pay for democracy.. Have to say, I don't know a better system..

Too few people (especially the young) understand what can & did happen with interest rates..

At the time I was in a well paid-job (Ah! happy memories..) with a (for then..) "big" mortgage and for a time things were very tough...


Best wishes to all, including those who disagree with me &/or think me boring ...

Cheers!

Lodger

theartfullodger

ONLY rent a property out if you can cope with the financial & emotional agrro of the "Tenant from hell" who you can't get out for 9 months whilst you keep paying the mortgage etc./ etc... and legal fees (to get him out) and then he 'phones you Saturday 10:22 pm "Toilet's bust wodja gonna do..." "Sorry to hear that dear sir, when did this start" "Wodja goona do... wodja gonna do - dunno 3-4 weeks maybe,.,.. wossat gorra do 'wiv it??" "OK, I'll get my man to call you Monday 1st thing..." "Nah, you gorra fix it nah..>""""


(PS Yes, you have a legal requirement to fix the gentleman's toilet, notwithstanding his not having paid you for 7 months,.....")

If you are not sure you can cope, find another business to go into...

And remember that your current lender may up the interest rate/charge fees as you will be letting..

& there are many other costs incurred when renting: And do your numbers only assuming you can rent for 10 or each 12 months....

Cheers!

Lodger

(Apologies to other readers for posting this advice yet again...)