How do you calculate how much rental a house can generate?

ukbondraider

This is just theoretical for now but how does one calculate the approx rental a house should generate?

My initial thinking was that the monthly rental that should be charged should be slightly less than equivalent interest only mortgage payment for that house over 25 yrs.

e.g a house bought for £500K over a 25 yr term at an interest rate of 6% will require a monthly repayment of £2500 Interest Only or £3260 Repayment.

Am I correct in that the rental someone should be charging on the above house would be say £2400? Or will it be alot less given that there is probably less demand for renting a big house.

Lets assume this house is now £600K which over a 25 yr equals £3000 interest only or £3912.

Should the rent charged now be around £2850 or still closer to the original £2400?

Indeed are these assumption totally incorrect?

thesaint

I don't think you can glean anything more than a very vague ball park figure of what a property will rent for vs price paid/worth.

It is purely what someone is willing to pay.

roswell

rent should be More than the cost of any borrowing plus a margin for repairs voids etc.

I think the general rule was 6% more than borrowing but interest rates and inflation are now eating badly into that.

talksalot81

thesaint wrote:

I don't think you can glean anything more than a very vague ball park figure of what a property will rent for vs price paid/worth.

It is purely what someone is willing to pay.

Ditto. If you tried the logic upon housing in and around where I live, you would be asking >50% higher than the market is currently asking.

lynzpower

My initial thinking was that the monthly rental that should be charged should be slightly less than equivalent interest only mortgage payment for that house over 25 yrs

my understanding is that a BTL mortgage lender would want to see 15% over the mortgage in order to lend, but thats only what Ive seen on here ( to cover voids, W&T etc)

itgirlinuk

So, how do you work out a rental return on a property?

I have always the estate agent who is showing me a flat about local rent rates? And I sometimes talk to the rental team at the estate agent to get a rough idea of the rental return? Is that a better way to gauge?

Generali

In London Gumtree or Loot will give you a better idea of asking rents. I'd take off 10% for the rent people actually pay, the multiply by 10 for an annual figure if you have a monthly rent or 44 if you have a weekly one. the 2 months or 8 weeks not accounted for will (hopefully) be enough to cover any voids and depreciation.

Divide that figure by the price of the house/flat/shed you are looking at and you have a yield. That is the return you will get on rental. Then compare that to the yield you can get on other investments (e.g. money in the bank, shares, bonds etc.) and you can get some idea of whether you've got a good deal or not, depending on how risky you think each of these investments is.

Kaminari_2

When i invest i look for at least 10% basic yield. So if i bought a property for £100k i would look at getting £10k per year rent or £833 a month. I always make sure that any investment i make meets this basic calculation before i look at other factors. This is very hard to achieve and very few residential property investments meet this. Most of mine have been creative.

Tassotti

To the OP

You cannot calculate rental figures the way you describe.

One has to research the rental market, and then calculate yields from selling prices.

wolvoman

Kaminari wrote:

When i invest i look for at least 10% basic yield. So if i bought a property for £100k i would look at getting £10k per year rent or £833 a month. I always make sure that any investment i make meets this basic calculation before i look at other factors. This is very hard to achieve and very few residential property investments meet this. Most of mine have been creative.

Interesting, how do you get near to 10%?

Residential property yields at the moment are hovering around 3%-5%
Commercial property yields in a similar range
High interest cash is about 5.5%
UK stocks average yield is about 4%
Gilts/Bonds are around the 5% mark too

Indeed I can't think of any investment offering 10% basic yield right now.

F_T_Buyer

You can't work out rents like that. You need to look at the market.

With current high house prices you will get nowhere near enough rent to cover a 100% repayment mortgage over 25years. The average gross yield is just over 5%.

So the rent you receive will not cover a 100% INTEREST ONLY MORTGAGE.


Obviously, they are distortions with this. The higher yielding properties are where HMO's, where each room is rented out seperately (e.g. student digs) or flats, because of maintenance charges.

Have a look at ARLA and RICS data. RICS have recently said the average yield is 3.25% NET, i.e. the rent after costs would cover just over half of a 100% interest only mortgage.

This is one major reason why people think prices will fall. You will only make money when prices rise, i.e. you are not investing on returns, but speculating on capital growth.

Kaminari wrote:

When i invest i look for at least 10% basic yield. So if i bought a property for £100k i would look at getting £10k per year rent or £833 a month. I always make sure that any investment i make meets this basic calculation before i look at other factors. This is very hard to achieve and very few residential property investments meet this. Most of mine have been creative.

Obviously, you expect average prices to fall by about 50% then in real terms.