BTL Yield

Miss_Samantha

Thrugelmir wrote: »

With simplistic logic like that. BTL wins hands down. Not surprising that some people never find that pot of gold.

It's not simplistic logic. It's how it works.

When you compare investments you compare the return on investment (obviously).

OP has a choice on how to invest the cash he has, which is 25% of the value of the property he is considering buying.

The property rental yield is indeed the rental income compared to the value of the property. This is only really useful when comparing properties and isn't your return on investment unless you are a cash buyer.

You cannot compare that 5% yield with the yield given by FTSE shares. You should compare your return on capital invested, 20%, with the return if you were to invest the same amount of capital in shares. (though of course you should really use net values, not gross ones).

Of course the return on investment has to be weighted with the risk.

Here the return is high because of leverage, i.e. because most of the money comes from a loan. This means that the risk is also potentially high.

That's how billionaires like Trump made their money: By investing the bank's money and reaping the benefits. Of course they could equally have lost millions.

Pixie5740

Trump has lost millions. Hasn't he filed for bankruptcy several times?

Miss_Samantha

Pixie5740 wrote: »

Trump has lost millions. Hasn't he filed for bankruptcy several times?

He did end up with billions, though.

But that's not the point...

The point is that comparing the property rental yield with the yield from shares is comparing apples and oranges because OP isn't a cash buyer.

jamels2

Say i have 50 k invested in a 200k flat with rent of 10000 a year.
The yield on the value is 5% gross.
The yield on my deposit is 20% gross, minus mortgage interest??
Which is the true comparison with say having 50k in the bank earning 1% interest?

Miss_Samantha

jamels2 wrote: »

Say i have 50 k invested in a 200k flat with rent of 10000 a year.
The yield on the value is 5% gross.
The yield on my deposit is 20% gross, minus mortgage interest??
Which is the true comparison with say having 50k in the bank earning 1% interest?

I replied to that in my previous post.

The meaningful comparison is on the return on your investment i.e. the 50k.

You invest 50%. In one case the return on that money is 20%, in the other it is 1%. (as said you should really rather use net figures, but you get the point).

BUT, as also said, you also need to compare the risks. To get this high return on the flat you have borrowed 150k, which is an extra risk on top of everything else, whilst your 1% in the bank is basically risk-free.

jamels2

If its the return on investment eg 50 k of a 200k flat then how do you take into consideration the mortgage costs before arriving at a yield?

Thrugelmir

jamels2 wrote: »

If its the return on investment eg 50 k of a 200k flat then how do you take into consideration the mortgage costs before arriving at a yield?

What matters is the net yield. Flats will incur different levels of service charges for example. Not just mortgage interest.

always_sunny

unless you're expecting huge capital appreciation, 5% [gross] yield seems very little for that much work!

Crashy_Time

https://audioboom.com/posts/5793636-sell-up-hold-or-expand

getmore4less

jamels2 wrote: »

If its the return on investment eg 50 k of a 200k flat then how do you take into consideration the mortgage costs before arriving at a yield?

£50k on £200k with £150k borrowed.

5% gross on £200k £10,000

interest rate and net yield on the £50k
rate : interest : net return : ROI
0% £0.... £10,000 20%
1% £1,500 £8,500 17%
2% £3,000 £7,000 14%
3% £4,500 £5,500 11%
4% £6,000 £4,000 8%
5% £7,500 £2,500 5%
6% £9,000 £1,000 2%

A 1 month void grabs another 1.7%
every £500 of expenses grabs another 1%

the other thing you have to look at is your break even with no HPI.

A £200k place will have entry/exit costs of around £5k + another £6k if a second home.

over 5 year with a 4% mortgage no voids and £11k costs to buy/sell you net £9k

Annual ROI 3.6% before Costs

for long term/lifetime investment the entry costs can be capitalized reducing the gross yield much less
(ie. if it was £10k costs the 5% on £200k becomes 4.76% on £210k

but you have now sunk £60k into the investment, so that staring out £10k income rather than being 20% yield is now 16.7%