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darwinsfoot
09-12-2005, 23:12 PM
Hi,

I am new to buy-to-let as have been just developing properties the last two years, but now wish to explore other avenues.

A couple of months ago I was watching something on buy-to-let and one guy was saying he doesn't buy a property for rental unless the yearly rental income will be a minimum of 12% of the value of the property (and not just the mortgage). I live in the south-east (Surrey) and can't find any properties that would give returnsanything even remotely like this. Is this an unreasonably high expectation or am I just not looking hard enough? What sort of return is reasonable?

Say, for example, I had £50k cash to put in as 25% on a £200k property so had a mortgage of £150k. What sort of yearly return would some of you experienced buy-to-letters settle for? Is it a case of as long as the rent will cover mortgage costs, insurance, any estate agent fees etc then it is worth doing? I am still relatively young so am looking very much for long term investment and am not interested in making a fast buck.

Any help would be much appreciated as I am on the cusp of entering the market...

Nick

MrShed
10-12-2005, 00:16 AM
My three small thoughts(just my personal opinion):

- The % of value of property(the yield) is more a measure of how strong the rental market is in a particular area than anything, or so I thought. Obviously it is always better to have a higher yield, but it is not the be all and end all.

- Much more important is your actual % above how much you are paying out(as you seem to indicate). Most BTL mortgage lenders stipulate that you must make 125% in rent compared to the mortgage payment - this would seem to be a good basis to start on.

- As I have recently said on another thread, how thin you want your profit margin to be depends both on how you see the market and also how long term you are wishing to keep it. If long(ish) term, and like me you believe there is little basis for the fairly widely predicted house price "crash" or fall, then you can afford even to take a small loss on a rental property , as long as your capital investment rises. I have spoken to an awful lot of landlords who rent at a break even level just to have the capital gain and asset of the property at the end, and this can be quite a good idea if you are in it for the long haul.

Ericthelobster
10-12-2005, 09:02 AM
Much more important is your actual % above how much you are paying out(as you seem to indicate). Most BTL mortgage lenders stipulate that you must make 125% in rent compared to the mortgage payment - this would seem to be a good basis to start on.But he should also consider the 'lost interest' on the capital sum he's investing, ie the 50K deposit. If you like, that should be considered as money he's 'paying out', as he would be gaining that money if the 50K were invested in, eg, a savings account.

darwinsfoot
10-12-2005, 12:57 PM
Hi,

Thanks for your replies. It has put my mind at rest a bit. Perhaps the programme I watched was made before the recent huge rises in property values hence the rents to property value ratio was at levels we are unlikely to see for a while!

Nick

dazalock
10-12-2005, 17:00 PM
I think the only way you will get a 12% return at the moment is with a HMO, but you will have to invest a lot more of your time managing it.

P.Pilcher
10-12-2005, 17:24 PM
When I started, over 5 years ago, gross annual rental returns were about 10% of the capital value of the property, thus I invested my pension nest egg and have received 10% on my investment ever since. Of course this is now higher than it was as I have been able to increase many of my rentals. BUT since I started, property values have also increased. This has had the effect of reducing the gross annual rental return to about 7% of the property value and anybody entering the market now will have to accept this return on invested capital. This is because market rents have not increased to the same extent as have capital values, but they are rising. In one Midlands town where I have invested, a large amount of "brown field" city centre development has taken place. These high rise apartments are now sold, on the rental market and have had the effect of depressing rents overall so I have been unable to raise my rents here for 5 years! As Dazalock says, rental returns in the order of 10% are only available from HMO properties which require a lot more management, are subject to much more local authority regulation and costs.

P.P.

susan 2
10-12-2005, 20:34 PM
Darwin - it depends very much on what type of property you invest in. Mine are all one bed and studio flats, converted from large houses. These are very easy to let and I am able to increase the rents by small but regular amounts every year. I am now in the happy position of having paid off all my mortgages, and they provide a superb pension. I had to do fire regulations etc of course, but having the income from 5 flats to cover each mortgage meant not quite so many worries if I had problems with one of the tenants. I started in 1985 and it has been 20 years of hard work, but well worth it. If you are prepared to stay in it for the long haul, and also look after the properties yourself you should be O.K. I have never used agents which saved a great deal. My returns are certainly well over 10%.

Energise
10-12-2005, 23:07 PM
I am not sure what use that % valuation has much use in your situation, its important if the investment is all of your own money but you are borrowing the majority.

Is it not more useful for you to to work with % rental income to mortgage repayment.

MrShed
11-12-2005, 02:29 AM
But he should also consider the 'lost interest' on the capital sum he's investing, ie the 50K deposit. If you like, that should be considered as money he's 'paying out', as he would be gaining that money if the 50K were invested in, eg, a savings account.

Very very good point eric....one that I missed. This is definitely true.....you need to take into account the increased income/capital gained by investing or saving in other ventures. Off topic slightly, but this is called "opportunity cost" in economics terms :D

darwinsfoot
13-12-2005, 18:18 PM
Hi,

Thanks to all that replied. Just a quick hypothetical situation for you to mull over if you have the time, which would also help me see an example in action so to speak...

OK, say there was a one bedroom flat and it could be bought for lets say £150,000. I could put down £40,000 so would need £110,000 mortgage. The flat could then be rented for £700 a month. So you are looking at about a 7.5% return on the mortgage amount. Is there anyone out there who would accept this return? What are the best buy-to-let mortgages that would mean one would have a bit of money left over to pay insurance etc? Or is it a case of at that low a return it just isn't worth it? Incidentally, there would be enough money elsewhere to cover any shortfalls in rent if need be as long as it wasn't a huge amount, like the place being empty for 6 months...

Again, any help would be much appreciated.

darwinsfoot
14-12-2005, 20:43 PM
Thanks for the reply. Definately a few more things for me to mull over...

Hurdler
05-06-2007, 09:42 AM
Darwin
I am in a similar position, looking to actually let out my flat to release equity to buy a house.

In my calculations, I have taken into account the following:
1) Rental Valuations from 3 reasonable estate agents (I discarded the most highly valued as the agents have an extremenly bad reputation for overpricing)
2) a rate of 130% of the probable mortgage (looked at a BTL Tracker, Interest Only)
3) Factored in all "pre-trading" costs (the up front safety check fees, legal fees, insurance, and of course at least 2 months mortgage cover in case it takes a while to let)
4) Aggregated those same costs for the subsequent year (i.e. 1/12 of those costs as part of the profit margin)
5) 10% wear and tear allowance also as part of the profit margin
6) Fully managed fees + VAT

I churned this up in a spreadsheet and came away with a goodish lump of equity and plans to make up the current shortfall between that and the new mortgage planned.
Consequently my resulting profit margin is pretty low - but then as other posters say on this thread, it's about the long-term gain and the ability to convert that equity into a sizeable deposit for a new house.

So long as the flat makes enough to wash its face, I'm not that worried as the subsequent year - the letting agents tend to increase the rent slightly and offer the landlord reduced management fees for a renewal.

Hope that helps a bit?