Is a 8.2% rental yield worth the hassle?

Newheight13

Hi,

I’m unsure whether to sell our current and only property and use the 130k it generates towards our new home  or rent out our current property, which will generate an 9% yield and just put 30k towards our new 300k property? Estate agents say our property will always be in high demand due to location next to the hospital, so I’m not concerned about it not having tenants and I have also been offered a fully managed service at a fee of 10%. I have all the required certificates at this stage and they would sort out everything else. 

What would you do? 

Thank you

_Penny_Dreadful

Newheight13 said:

Hi,

I’m unsure whether to sell our current and only property and use the 130k it generates towards our new home  or rent out our current property, which will generate an 9% yield and just put 30k towards our new 300k property? Estate agents say our property will always be in high demand due to location next to the hospital, so I’m not concerned about it not having tenants and I have also been offered a fully managed service at a fee of 10%. I have all the required certificates at this stage and they would sort out everything else. 

What would you do? 

Thank you

9% sounds high in the current climate.  How has that been calculated?  How long will it take you to recoup the extra £9,000 SDLT you will pay when you purchase your new £300,000 home?

Is this the £220,000 property in your previous thread:

https://forums.moneysavingexpert.com/discussion/6422378/confusion-over-higher-rate-land-tax

That you were going to let at £1,000pcm in this thread?

https://forums.moneysavingexpert.com/discussion/6422376/set-up-ltd-company-for-2nd-property-or-not

Newheight13

Hi, yes that’s right. 3 agencies came out and said that it would go in less than a week on the rental market at £1260 pcm. 

I used a yield calculator - we bought it for 132k and spent around 20k on doing it up. 
Will take around 2 years to recoup the land tax.

Thanks 

ManuelG

_Penny_Dreadful said:

  How long will it take you to recoup the extra £9,000 SDLT you will pay when you purchase your new £300,000 home?

This was what put me off doing similar to what the OP is considering. I decided if I wanted a second property to rent out, I'd rather pay the extra stamp duty on the cheaper house!

silvercar

Newheight13 said:

Hi, yes that’s right. 3 agencies came out and said that it would go in less than a week on the rental market at £1260 pcm. 

I used a yield calculator - we bought it for 132k and spent around 20k on doing it up. 
Will take around 2 years to recoup the land tax.

Thanks 

Yield should be based on current value, not what you bought it for.

GDB2222

silvercar said:

Newheight13 said:

Hi, yes that’s right. 3 agencies came out and said that it would go in less than a week on the rental market at £1260 pcm. 

I used a yield calculator - we bought it for 132k and spent around 20k on doing it up. 
Will take around 2 years to recoup the land tax.

Thanks 

Yield should be based on current value, not what you bought it for.

Absolutely. The op is comparing the equity he now has in the property with the rental yield on the original purchase price. That’s highly confusing. 

Mr.Generous

I calculate yield as a return on capital invested - purchase price plus renovation costs and other expenses - my yields dont fluctuate with property prices.

Penny remember that if you sell the rental within 2 years (I think - check yourself) you can reclaim the extra stamp duty you paid. At over a grand a month in rent even 18 months would build a decent nest egg.

Keep_pedalling

Mr.Generous said:

I calculate yield as a return on capital invested - purchase price plus renovation costs and other expenses - my yields dont fluctuate with property prices.

Penny remember that if you sell the rental within 2 years (I think - check yourself) you can reclaim the extra stamp duty you paid. At over a grand a month in rent even 18 months would build a decent nest egg.

That is £1000 minus expenses minus income tax and minus additional mortgage interest on the new house. 

And if it doesn’t work out,getting it sold within 2 years will be tricky if you can’t get your tenants out in time.

GDB2222

To avoid all this confusion over yield, simply look at what the income is versus outgo.

The outgo is the extra mortgage payments on the extra £130k borrowed. At say 5% interest, and ignoring capital payments, that’s say £6,500 a year.

Alternatively, keep the current property and get £15,000 a year in rent. That sounds rosey, but £1500 will go to the agent. There’s upkeep and insurance, say £2000. Plus, there’s an existing mortgage of £100k, and the mortgage interest will be around £5,000. Then, there’s tax to pay on the rent less expenses.  

So, the op needs to do his sums and work out a detailed budget. Only then can he see whether this makes any sense. 

Bear in mind that the short term outlook is for prices of property to fall, but the long term trend has been upwards. 

silvercar

Mr.Generous said:

I calculate yield as a return on capital invested - purchase price plus renovation costs and other expenses - my yields dont fluctuate with property prices.

Penny remember that if you sell the rental within 2 years (I think - check yourself) you can reclaim the extra stamp duty you paid. At over a grand a month in rent even 18 months would build a decent nest egg.

Given the choice is now between selling at ~£220k or keeping, the yield should be calculated on the £220k. The £132k is history.

 

steampowered

Before you can make any rational decision, you need to work with realistic numbers.

The property is not really a 9% yield. You need to take account of:

• Mortgage costs - If the op only has £130k of equity but the property is worth £220k there must be a mortgage on it
• Estate agent fees - and the VAT (is the 10% including VAT?)
• Void periods (a quick google search suggests a typical void period is 3 weeks a year, so take off 6% of the rent for that)
• Allowance for property maintenance costs (as the landlord you are responsible for upkeep of the property - this isn't covered by the estate agent fee. If you scrimp on this then your property will go down in value over time)
  
• Allowance for emergency costs (e.g. if the boiler breaks that's your problem)

You need to deduct all of those costs from the gross rent.

Then you need to compare that against the actual value of the property (£220k?)

That gives you your ACTUAL yield.