Gross Yield - What is it???

whambamboo

Debt_Free_Chick wrote:

I can see arguments for using both.

Firstly, if you use the original purchase price, that reflects the amount of capital you originally tied-up in the property (let's ignore the effect of gearing/mortages for a moment and assume a cash purchase!). So the yield would be a fair comparison for what you would get, if you had the money in a building society instead, but drew down the monthly interest as income e.g. you bought for £180,000. Currently you are getting a yield of 8%, but if you had £180,000 in a savings account, you would only be getting 5% yield (interest). You have to ignore the compound effect of leaving the interest in the savings account, as there is no comparable way to do this with the rent on the property - you get the rent as income each month.

Except a 8% yield on a savings account is clearly much much better than an 8% yield on a house, as the savings account doesn't suffer from subsidence, flooding, annoying tenants, void periods, etc. And there is also no risk to your capital.

If you have £120,000 in cash, and use it to buy a house for £120,000 and rent it out for £500/month, you are simply stupid. The chances are the property will underperform other investments, such as the stockmarket, in capital growth, and 5% yield is pathetic, especially given the hassles of being a landlord.

Of course BTLers argue that even though they are getting worse yields than the bank, and losing money every month, it's a good deal because they are borrowing money cheaply. This is the only argument in favour of buying to let with low yields (below say 7-8%) - the property is likely to rise in value faster than inflation over 25 years, and with mortgage interest rates low, while you can't borrow to invest in the FTSE (although most BTLers would be horrified at doing this)

There is no other reason to buy-to-let other than basically arguing that house prices will go up at a rate higher than your mortgage rate minus the net return from renting, minus the value of your time managing the thing, etc.. Unless this happens, you lose. This is pure speculation - it's not a risk-free enterprise, but it might prove to be right.

Of course the irony with property is that if interest rates go up from their low current state, your asset will actually lose value.... So if you had kept your money in cash, it would continue to grow, as would stocks and shares. But with property an increase in interest rates will reduce the capital value of your asset, while rents are unlikely to keep pace. And then you really are in trouble.

Personally, I would steer well clear, there's really no reason to get into property speculation, it's no different from stock market speculation, unless you really know what you are doing and have a lot of assets and a balanced exposure to a range of investments with their associated risks.

whambamboo

F_T_Buyer wrote:

If you put £100 into a bank paying 5% interest, you would get 5% yearly yield on that account even if you left that money in their for ten years.

At the end of the 10th year, the amount in your account would be £155.13

Actually that's after 9 years :-)

After 10 years you would have 100 * 1.05^10 = £162.89

Of course when you've taken off 40% tax (which also applies to the income on the house), which I imagine anyone who is BTLing would be paying, so you only get 3% net. Which is barely above inflation.

So after 10 years with higher rate tax you have got £134.39

With BTL you may not be earning on your money, because it has been turned into a house which is not turning a profit, but you will be taxed on the capital gains when you sell. This would be charged at 40% as well, but you get capital gains relief, which tips the scales towards property ownership compared to savings - but again shares historically outperform property, and these would offer capital gains relief as well.

So the tax system doesn't favour saving at all - even the best savings accounts after 40% tax barely keep up with inflation. Taking advantage of CGT is a good thing from this perspective, but current asset prices for property make it a highly risk investment.

whambamboo

Further to my comments above, buy to let is a myth. The correct term is borrow to let, as buying with cash rarely makes sense in today's market, unless you get some high yield squat with every room let out (which again turns it into a job, and you need to factor in the cost of that).

Leighthal

Is this a good yield?

http://www.rightmove.co.uk/viewdetails-3887133.rsp?pa_n=2&tr_t=buy

barnaby-bear

whambamboo wrote:

There is no other reason to buy-to-let other than basically arguing that house prices will go up at a rate higher than your mortgage rate minus the net return from renting, minus the value of your time managing the thing, etc.. Unless this happens, you lose. This is pure speculation - it's not a risk-free enterprise, but it might prove to be right.

There's also the free subsidy to higher rate tax payers buoying up the system. 40% tax payers can write off tax etc and any refurb is VAT free, so a BTLer can buy a property needing work for more than a FTBer and do the work cheaper - fair eh *sarcasm*!

F_T_Buyer

Leighthal wrote:

Is this a good yield?

http://www.rightmove.co.uk/viewdetails-3887133.rsp?pa_n=2&tr_t=buy

The gross yield on that is 12*£1000 monthly rent = £12,000
divided by £110,000 = 10.9%

So, yes a very good rental property. Assuming you can get that in rent of course!

~

Opps my intial calculation above was 9 years, my bad...

RHemmings

Leighthal wrote:

Is this a good yield?

http://www.rightmove.co.uk/viewdetails-3887133.rsp?pa_n=2&tr_t=buy

I work that out as a 10.9% gross yield. From what I know of letting, that's a good yield. That is a HMO, but currently fully let. Even if you had one room empty, on average, all the time that would still be a 8.7% gross yield.

I'm not an expert property investor, but things that could make it a bad investment would be if there are developments which could kill the rental market, such as a major employer closing down and leaving the area. If house prices are falling in that area, then higher rental returns would be necessary to make up for the loss of capital. Another potential problem would be if the house requires work, either to repair faults or undertake major maintenance, or to bring it into line with recent legislation controlling HMOs.

Looking on rightmove for 5 bed houses in Cleethorpes, there is only one out of 18 properties cheaper than the one you list.

http://www.rightmove.co.uk/viewdetails-5050905.rsp?pa_n=1&tr_t=buy

Which has an asking price of £102,000 rather than £110,000. This doesn't make the cheaper house a better deal. Not that I know anything, but I think the advantage of having a fully tenanted building rather than having to find tenants from scratch is easily worth a few grand.

Strangely, when I took a postcode from Brereton road and searched on it in rightmove for 5 beds or more, your property didn't come up. Oh, your property is under offer. Is it you making the offer?

Looking on nethouseprices.com there has been a terraced house that sold for £125,000 in 2005, but most of the other sales have been for considerably less. This could be due to fewer bedrooms in those houses. But if you know the number of the house in question, and the number of bedrooms in some other house, you could work out whether the £110,000 asking price is out of kilter with typical sale prices.

As I said, I am not a property developer/investor/landlord. But from what I can work out, that property seems to have a good yield.

BobProperty

Leighthal wrote:

Is this a good yield?

http://www.rightmove.co.uk/viewdetails-3887133.rsp?pa_n=2&tr_t=buy

Not enough for me and the yield will fall somewhat when you have to do all the HMO work. :eek:

whambamboo

F_T_Buyer wrote:

The gross yield on that is 12*£1000 monthly rent = £12,000
divided by £110,000 = 10.9%

So, yes a very good rental property. Assuming you can get that in rent of course!

Key is that it is a HMO. Which means it's occupied by lots of lowly paid single foreigners in all likelihood. Not a bad thing necessarily but might be extra hassle getting them all to pay the rent, versus one person, extra wear and tear, etc. You also need to comply with HMO laws, which may cost you, and also remember that a house being sold as an HMO might be marketed at a higher cost than a similar property not under multiple occupancy. So if you can find a cheaper house not currently an HMO and let it out on the same basis you'll get better return, providing there is demand from rent a room types.

BobProperty

barnaby-bear wrote:

There's also the free subsidy to higher rate tax payers buoying up the system. 40% tax payers can write off tax etc and any refurb is VAT free, so a BTLer can buy a property needing work for more than a FTBer and do the work cheaper - fair eh *sarcasm*!

That's new build only, you don't get VAT back on refurbishment.