Buy-to-Let Mortgage

garysletters

Hi Mesh,

I'll try to answer your questions (from my point of view)
I can see logic in each of the previous replies (looking through the vitreol) but I tend to land a little nearer the Grinch than Mean machine, and no where near eurows. (I also don't take notice of the times thanked ratio......some threads/users give em out for nothing at all, just so they look good.)

To work out yield....(all made up examples)
purchase price - £120,000
rent - £500 per month.
rent x 12 months = £6000.
£6000/£120,000 = 0.05 =5% yield. = poor.

I dont look at anything under 10% yield. I look at 1% per month (i.e. if purchase price is £120,000, I'd want £1,200 a month rent from it.) it's much easier to work out.
There are still properties returning way over 10% if you look carefully!!! (people will probably disagree and laugh, but I've bought several this year already).

If you are buying to rent, especially at this time, it has to be a long term decision. drops in house value should not be a major concern to you as you will be holding on to your property. Your concern should be interest rates!

It is NOT a great time to start buying BTL properties, but if you get the right place, you can still make money from it.

good luck, but be careful.......and make sure the figures (yield) adds up.

meanmachine_2

Realistically you should be multiplying your monthly rent by 10 not 12, as you have to factor in voids. To not do so is being, shall we say, on the wrong side of optimistic.

In London, I've been looking one bedders and the average price is around £180K. Chances of getting £1800pcm on these? Zero.

More like £800pcm at the most. And that would give you a realistic yield of 4%. Terrible. And let's not forget maintenance and agency fees (if you use one).

garysletters

mean machine, I agree with what you say totally. However, I was mearly answering mesh's question about how to work out the yield. I was not intending to sound "on the wrong side of optimistic" hence the part I added about my criteria.

As I said, I actually only look for properties yielding 1% a month.

we all have our own different factors to consider.

I was going to add to my last post that people overestimate how much money can be made from BTL. In my experience the amount of money I come out with (net profit, after mortgage/maintenance/fees/tax etc.) is only around 25-35% of the rent recieved. most 'newbies' imagine it would be much much higher than this. The reason I didn't post this is that everybody's different and this figure could vary wildly depending on your mortgage repayments. These are mearly my figures.

Kenny4315

I was a landlord (I have turned in my chips and am awaiting further developments), now is NOT the time for BUY to LET, trust me. Put your cash away and wait, you have missed the good times. The novice landlords who have bought recently are now in for some pain.

Kenny4315

Money on property is made on two components :

1. Rent less expenses blah blah equals Net Profit or Loss

2. Capital Gain / Loss - this is the most important component for any landlord, it is the whole basis for investment in property and presents both in main benefit and its main risk.
The investment benefit of property over other items is that you can use leverage to get more for your cash. EG, £100k property, £10k deposit, 10% growth you make £10k (assuming zero profit/loss on normal operations), same £10k in bank or shares (not including options, and very risky stuff), 10% return you make £1k. However, in a falling makret the opposite is true.

Mesh_2

Thanks again.

I now understand how to work out yield, but I don't really understand the basics of what yield means to me? ( sorry if this is a stupid question).

Am I right in saying a yield below 10% is bad ,but why is it bad?
A yield of above 10% is good, again don't understand why.
Is 10% the break even yield?

On the positive side I do understand Profit/loss. Capital gain/loss

Meanmachine: great website .. thanks

meanmachine_2

Yield is essentially the money you make from renting to cover your mortgage and other expenses.

Anything below 10% really isn't worth all the hassle that being a landlord brings, including the legal responsibilites should a tenant refuse to pay up, or be killed in a house fire.

A 10% yield is better than a 5% yield, just like 10% interest on a savings account is better than 5%.

In recent years, inexperienced people have piled into buy to let because they see property as a safer bet than pensions.

THis is fallacious, because they're comparing past performance (our recent housing boom) with what they hope is the future performance.

But as rightmove, for example, are predicting flat house prices for at least 7 years, there will be no capital gains, nor will your yield be very high either.

A lose lose situation, in other words.

The fact that lay people like yourself have cottoned on is normally a sign that the gold rush is at an end (no offence!).

Mst professional landlords stopped buying a few years ago.

GreenB_2

Just to contridict what you are saying - If someone has invested as a "pension" they are probably looking some 25 + years ahead. Over any 25 year period the price of houses has increased considerably.

There will always be a market for rental properties (much like yourself who is waiting for prices to drop)... if more people think like you then demand for rental properties will increase and rents will go up, so also will yeilds (especially with lower interest rates - I have notice some BTL rates under 5% now).

GreenB_2

I think the yield part is irrelivent - thats just my view

If you are getting in more than you are spending you are making a profit. Ok if its your £120k or whatever it may be better to invest it at 5% - but if its the banks money (mortgage).......

A house bought now WILL be worth probably 3 times as much in 25 years time when you retire and use it as a pension!

Pal

I think that the concentration on the simplistic yeild figures is misleading. The real measure is what is the expected profit that will be made as a percentage of the up-front costs of purchasing the property.

This is why I asked how much the OP was putting down as a deposit.

In other words, if you can buy a property for £100k without putting any money down (i.e. a 100% mortgage, no stamp duty, conveyancing costs etc), all your costs (including voids and maintainance) are £400 pm and you get £500 in rent, then your profit is £100 a month for no money up front. I.e. a infinite percentage return.

If however you are putting down a £15k deposit, and purchasing will cost you £5k in total (fees, stamp duty etc), and are making £100 a month profit, your actual yield on the deposit money is 6% p.a. This is slightly higher than a savings account, but probably not high enough to warrant the risks (tennants, interest rates, damages, costs)

If your total buying costs including deposit are £30k and you are making £100 a month profit then your yield on the money you have paid out is 4% p.a., and you could get more than that in a savings account at no risk and no with no effort.

Property people will claim that you could buy looking for capital gains, but for me the market is just too risky at the moment. Others will claim that if you hold for 25 years then property is bound the increase in value. This may well be true, but I would rather buy at a lower price in a couple of years time and make even more money than risk buying now and suffering a geared capital loss.