Estimate right property price based on rent yield

princeofpounds

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...

High interest rates are not necessarily a bad thing. You only think they are bad because they hurt you as a borrower. However sometimes they are very, very necessary for an economy. If you have monetary policy that is too loose you end up with situations like that we have had in the last 2 years worldwide, or even a Zimbabwe situation.

I could get into a whole Thatcher good or Thatcher bad argument, but that would be quite off-topic. All I know is that a lot of the things she is criticised for tend to come from positions of relative ignorance on how the world and the economy really works - sometimes doing the right thing is painful.

sebtomato

Sorry, but none of this has anything to do with the original question, which was about estimating the purchase price of a property based on how much it could be rented for, using a decent yield for rental.

If a decent yield is 5.25% currently, a similar property is rented fior £1,200 a month, there are £150 of service and ground charges, then I can work out what would be an expected maximum property price.

I am not planning to buy then rent the property, unless I have to so, because I have to move to a different location, and I can't sell the property.

Fire_Fox

It has everything to do with your question! Why bother asking if you don't want considered responses from professional landlords?

A decent yield isn't 5.25%, the current average yield in London is 5.25%. Cue lots of unhappy landlords: interest rates are at an all time low so yields *should* be at an all time high as the yield equation takes account of interest rates. It's unlikely interest rates will be so low by the time you have to rent out so, as ArtfulLodger patiently explained, your 4% could easily turn into a whacking loss.

Entertainer

Yields in London are pitiful right now. If you want to know how it compares, do a search in Rightmove for your location and see what other property is being rented for. Bear in mind that rental yields bear no relation to fair value, they are determined by capital prices which are being driven by very low base rates. In the late 90's, rental yields of 12% could easily be found in London when interest rates were 5/6%. Yields are very low historically and would only begin to look attractive if we had many years of base rates below 3%. Your guess is as good as anyone's whether this is going to happen.

Btw, Artful Dodger's deconstruction of the 80's omits to mention the crucial fact that inflation was much higher (in double digits at the start of the decade) which means that real interest rates were about the same as they were in the 90's and 00's. The real cost of your loan was in fact the same as it is now because it was being rapidly devalued by inflation.