Buy to let - Help me please re yields

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BathBath

Posts: 1
Joined: 30/12/2006

Buy to let - Help me please re yields
I am looking to buy my first BTL and so far have not seen anything that seems to cover the costs. I am not sure if the area I am researching (Bath) is just saturated or if I am being too ambitious with my calculations. Everyone talks about yield, but can someone please tell me the exact calculation used to work out yield on a property. I can see how I can cover an interest only mortgage, but not when I take the large deposit into account. Secondly. I have seen a flat for £147,500 which currently rents out for £615pcm. Using your calculation what rent would need to be achieved to break even/ or what property price would need to be paid to break even with a onthly rent of £615? I just need to understand the calculations before jumping in. Many thanks if any of you are prepared to help. No one has been on other forums.

Report Abuse | Date 30/12/2006 10:46:02 PM

P.Pilcher

Posts: 113
Joined: 25/7/2003

RE: Buy to let - Help me please re ... (in reply to BathBath)
Like all markets, the rental market is governed by market forces - the law of supply and demand. When I started way back in 1999, yields were in the region of 10% - i.e. the annual gross rental income was approximately 10% of the value of the property. Add to this the fact that properties were appreciating themselves in value at about 10% as well, this gave a gross total return of 20%. Invest money in any form of investment which promises a return of 20% and the whole financial industry would howl at you "venture capital, very risky" and so on. I mean to say, an investment in British property being termed very risky, I ask you! Since that time, my "very risky" investment strategy has made me a property "millionaire" (just) with an income which keeps the wolf from the door, but I would not like to suggest that I live in any form of luxury. Since that time, we have seen the pensions market collapse and other people realise that an investment in British property is not so risky after all. This has put up demand very considerably with the inevitable result that property prices increase. (Thank you very much - I'm all right Jack) The gross rental yield has thus fallen to a level that the market is prepared to accept and this is often below 7% and sometimes below a level that will pay a mortgage and the other asociated costs of buying and running a rental property. That such properties are still selling is justified by the opinion of the purchasers, desperate to provide for their old age, that eventual capital appreciation will justify the fact that they have to subsidise their rental inverstments out of their own pockets in the early years. Whether the market conditions will revert to those of seven years ago, or when, I wouldn't like to say. The doom and gloom merchants have been predicting a property price crash or, more sensibly, a property price stabilisation for some years now but despite two interest rate increases, property is still appreciating! What to do in your position is a very difficult question. Nobody knows whether we will get a property price "crash" leaving you with negative equity and struggling to service your mortgages out of earned income, or (more likely) a property price stabilisation for some years which will leave you still servicing your loans for longer than you anticipated. On the other hand, if you don't jump now, you may say goodbye to a decent chumk of capital appreciation on someone elses' money. I can still vividly remember writing out, with shaking hand and full of doubts the first cheque for £30,000 of my life savings when I bought my first investment property. Said investment is now returning me 15% per annum from rental income and has grown to about £90,000. What ever you decide to do, I wish you luck!" P.P.

Report Abuse | Date 31/12/2006 3:32:59 PM

bluetop

Posts: 11
Joined: 4/1/2007

RE: Buy to let - Help me please re ... (in reply to BathBath)
Phew!! That was some reply P.Pilcher! A very nice potted recent history on the buy to let market. Hello BathBath, To get your head around 'yields' and 'returns', the more usual formula for calculating this is as follows; multiply your monthly rent by 12 then multiply this by 100 e.g. let's take your example above to see the yield. 615 x 12 = 7380 7380 x 100 = 738,000 You then take this figure and divide by your total capital investment (i.e. the price you paid for the property plus any capital investment to improve it). Let's suppose that your flat needed no capital investment and was bought 'ready-to-let' so that we divide £738,000 by the purchase price of £147,000 £738,000 = 5.02% £147,000 You need also to take in to account the numbers on a monthly basis so that you are operating at a profit. Supposing you take an 85% LTV (Loan to Value) mortgage on an interest only basis your monthly loan repayment will be £548.51 on a loan of £125,375 (85% of purchase price) your operating gross profit (before allowing for buildings insurance and agency fees) will be just £66.41 which would undoubtedly be eaten up by agency fees. The numbers for this property simply don't stack up but I have seen worse. You can invest in other parts of the country and achieve yields of over 7% with gross profits. We are currently promoting properties in the north east (of England) with yields in excess of 7.5% and giving gross operating profits around the £130 - £150 pcm As a first time poster on this forum I don't want to transgress the rules by saying any more about what we are doing and getting kicked off here but if you look at the commercial forum I have posted something there. I hope this has been helpful and I am sure as a first time investor you will get good advice using forums like these. < Message edited by bluetop -- 4/1/2007 6:56:47 PM >

Report Abuse | Date 4/1/2007 7:00:19 PM

chrisbell

Posts: 37
Joined: 4/6/2006

* IGNORED * (in reply to BathBath)
This user is on your "block" list and the message has been blocked. Click here to unblock this user and view this post. < Message edited by Admin -- 13/1/2007 1:30:59 PM >

Report Abuse | Date 11/1/2007 9:01:17 PM

simhar

Posts: 101
Joined: 5/4/2007

RE: Buy to let - Help me please re ... (in reply to chrisbell)
Surely you have to take into account rising interest rates into the equation????? cheers simhar < Message edited by Admin -- 9/11/2007 1:43:53 PM >

Report Abuse | Date 11/7/2007 7:09:17 AM

enrikole

Posts: 10
Joined: 27/2/2008

RE: Buy to let - Help me please re ... (in reply to BathBath)
you have to take into account rising interest rates into the equation __________________ < Message edited by Admin -- 4/3/2008 7:45:16 PM >

Report Abuse | Date 3/3/2008 2:54:34 PM

simhar

Posts: 101
Joined: 5/4/2007

RE: Buy to let - Help me please re ... (in reply to enrikole)
Ok - sounds like you've got your head screwed on! cheers simhar Web: Properite Landlord Software - http://www.properite.co.uk

Report Abuse | Date 8/3/2008 6:28:03 PM

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