Net Yield Calcs and Opinion

chrisrsmith

I have a house valued at £420,000

outstanding £95K mortgage paying £1420 / month - finishes dec 2019 - int rate 2.59%

Am trying to work out wether to sell or rent the property out. Rental income quoted as £1700 / month.
10% Mngt fee and say factor 10% for normal house maintenance.

Question - what is the Net Yield if I rent out?

The house is in Bucks and am thinking of doing this to maintain a 'hold' in this area for property future investment.

OR am I better to feel up and but a smaller property that could rent at £1000 / month, same factors for mngt and maintenance. I could sell current house, pay off mortgage and buy the smaller property and rent it out (having no mortgage).

Thoughts / suggestions / calculations….

I will be living in a cash purchased cottage near the coast with a letting/holiday annexe generating enough income to cover my existence there.

I_have_spoken

You need to treat letting as a business and hard work with potential downsides of problem tenants, voids, poor agents etc. and the CGT on disposal.

Moving away from the area makes letting even more bothersome

IMHO, letting just in the hope of capital appreciation in the locale isn't a great idea.

Cornucopia

Switch the mortgage to IO (if necessary by remortgaging it as BTL). You could also remove some equity at the same time.

Your current figures are probably not going to work. (Too little margin between the rent and the mortgage).

SG27

£1420 - 20% for fee/maintenance = £1136

Assuming are lower rate tax payer net income would be £908.80

£10,905.60 pa giving a net yield of around 2.6%.

Although, to convert to a BTL mortgage your rate will probably increase and also you could have voids so your 20% costs may actually be higher

jjlandlord

Usually, yield is calculated based on how much you bought the property for, not its latest valuation.
Anyway, using the valuation:
1,700x12x80% / 420,000 = 3.9%

Gross yield is also telling for comparisons since some costs are not compulsory:
1,700x12 / 420,000 = 4.9%
which is rather low if you were looking to buy the property to let.

Since you have significant equity in the property you could also remortgage it and use the money to buy further properties.

Re. mortgage, if this is a repayment mortgage then your cost is only the interests part of the repayments.
There are other costs, like insurance and void periods to add to get more accurate real net yield.

slopemaster

Reposting this from another thread as it might be relevant:
Just to give you an example of costs
I let 3 houses and have just worked out costs for the past year

House 1, owned outright, managed by agents, had electrical work done this year, costs 25%
House 2, owned outright, self-managed, small amount of maintenance, change of tenants, costs 12%
House 3, self-managed, small interest-only mortgage, change of tenants, fairly major roof problem this year, costs 30%

These costs incude everything except tax - ie insurance, letting expenses, gas safety certificates, adsvertising, etc etc. None of the houses have had any unpaid rent or any voids longer than a few days. They're different types of houses in different areas. The large variation in costs seems to be more down to random factors than anything else. (I would have expected House 2 to maybe need work, but in fact it was 1 and 3 that came up with completely unexpected problems.)

slopemaster

Nett yields on the above houses, calculated on current values, are approx

House 1, detached 3-bed bungalow in wealthy rural area, 2.5%
House 2, 2-bed terrace in urban area with high demand 5.3%
House 3, better quality 2-bed terrace in urban area with high demand, 4%.

House 1 belonged to my parents; I would not have bought it to let. I might trade it in for smaller properties one day.
House 3 was bought for me to live in.

House 2 was a BTL investment.

slopemaster

It's not a general rule perhaps, but I think smaller properties tend to have better yields. So maybe sell, and buy something specifically to let - maybe somewhere nearer to where you will live, so you can manage it.
you could get IO mortgage and buy 2 smaller ones - but getting a BTL mortgage might not be straightforward as they like an income from employment as well as rent.

AndyT678

jjlandlord wrote: »

Usually, yield is calculated based on how much you bought the property for, not its latest valuation.

Disagree. The calculation should be based on the true market value otherwise you can't compare it to any alternative e.g. Selling and putting the money in a bank.

My in laws bought their house 40 something years ago for about £3,000. They could let it out for about £2,000 per month now so £24,000 per year. Calculating the yield as 24,000 / 3,000 = 800% would be entirely misleading.

Calculating it as 24,000 / 400,000 = 6% is much more realistic.

Edit: I should have said the realisable value not market value - need to take out the mortgage value and any selling costs

jjlandlord

AndyT678 wrote: »

Disagree. The calculation should be based on the true market value otherwise you can't compare it to any alternative e.g. Selling and putting the money in a bank

It obviously depends on what you are trying to figure out.

In general 'yield' is based on the price you paid for the investment, not its current value.
That's because 'yield' is a metric related to return on investment. It's the return the investment yields.

So there are several flavours of yield: 'cost yield' (above), 'current yield', etc.

Yield based on current valuation can be equally misleading because it includes potential capital gains or losses.

Like all financial metrics one must really understand how it is calculated and what it means.