David Lawrenson, property consultant writes, Last week I was contacted by a journalist who was writing a piece about high yields in property for a national paper.
She wanted a quote from me about what would be a good level of gross yield to aim for.
She wanted a one-liner – X% or Y%.
I said that was impossible – and tried to explain why…..
I asked her to imagine a posh 2 bed house in very smart West London at £60,000 annual rent. The house price is £3m, so a gross yield of just 2%. This is not an unusual yield in those parts of London where the rich of the world are happy to park their often ill gotten gains. (Many are happy to leave their London properties empty, as this is better than leaving their cash at home and at the mercy of a new political regime!)
Now suppose the roof and boiler break and need replacing. And say the cost of this is £10,000 altogether. The impact onto the net yield that year will be to make net yield that year 1.67% (assuming no other costs that year). (£60K -50K divided by £3m).
Now, imagine a same size 2 bed house in a poor area. In many parts of Liverpool, the North East of England or South Wales there are 2 bed houses where the rent would be £4,000 rent a year and the price of such property is say, £50,000. This gives a much higher 8.0% gross yield. Suppose the roof and boiler also break here and need replacing.
Well, the cost of roof and boiler materials will be much the same as in London, but hey, let’s be generous and say total replace / fix cost is £8,000 (as labour is a bit cheaper outside the capital).
As you can see those repair costs have wiped out your yield to nil …for 2 years running!
But it is far worse that that.
In more depressed areas with little inward investment, the prospects for capital growth are always much lower too.
These types of area are often the areas tipped by the many unscrupulous property gurus who are keen to get amateur investors to hand over their cash. They always point to the great gross yield, but the maths I have just shown you soon drives that down to nil at net level.
And never mind the cost “hits”, once you have a few void periods and a few duff tenants who default on the rent things can get even worse. (Bad tenants are also more to be found in depressed areas and voids can be more common too in areas of low housing demand).
The journalist wanted a headline figure, without the nuanced comments, without the explanation of why a headline figure makes no sense.
I refused. ……and I was not quoted in the piece.
I only tell the story to highlight how the editors in the media like to keep things simple -and instruct journalists to do the same.
But the real story takes more than the 800 or so words allowed to the journalist – and this means the readers continue to miss the real facts.
About David Lawrenson
I’m David Lawrenson, owner of property consultancy, LettingFocus.com. I’m author of the UK’s best selling property and buy to let book as well as fitting in being a landlord, a buy to let expert and media commentator, property writer, public speaker and landlord blogger. However, our main work is now our consultancy. We help a range of organisations – from banks to local authorities – develop or improve their buy to let and landlord facing products and services. We also help them develop their strategy towards the private rented sector. In addition to our work with organisations, I also find a little time to help private investors and landlords as a property advisor and mentor.