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  • Buy-to-Let

    "Rule of ten"

    I've read in a couple of places about the so-called 'rule of ten' - the idea that the expected annual rental income on a buy to let property should equal 10% of the purchase price.
    Just wondering, would people here regard that as a useful rule of thumb? Is it a realistic expectation in the current market?
    All thoughts appreciated.
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    I agree Roberta. Every property and every deal is so unique, and must be assessed individually. It also depends on the circumstances and perspective of the potential buyer, as what I think is a good deal for me, might not be a good deal for you!
    Cash flow is paramount, as always.
    I think investors gradually formulate their own personal winning formula if they build their portfolio safely, sensibly, and slowly.
    It's not about how many props you own, it's how much money you are making!
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    The rule is not a rule as much as a guideline.
    In other circles you will hear that 15% gross yield is the key.
    In the UK we would say 12% gross yield is the 1% rule. Each month you expect to collect 1% of the purchase price. In other markets the 'rule' is 2% with 30% equity when you buy. That would be similar to 24% yield.
    The rules are a filter to reduce the time you waste when scanning for deals. They are not hard and fast rules. Dig into the details. Anything that looks at gross yield can be very deceptive or misleading if you do not dig into the details.
    John Corey
    https://www.ChelseaPrivateEquity.com/blog
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    One more comment.
    The 1% rule in the US has been around since I stated investing in the early 1980's. It is not new and there is no magic when you work out what it means in terms of cash flow.
    John Corey
    https://www.ChelseaPrivateEquity.com/blog
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    Thanks all for your interesting replies.
    Just to be clear, in case anyone was worried, I wasn't suggesting basing a purchasing decision entirely on this 'rule' (note the quotes!) nor regarding it as unbreakable. I realize there are many factors to consider but, as I said in my original post, I'm trying to get a handle on whether such formulae can be useful as guidelines or rules of thumb.
    It strikes me that there ought to be some correlation between purchase price and rental yield. Although affected by many other considerations, these are still two fundamental measures of a market's worth and it's not unreasonable to think there would be some kind of statistical analysis that would be useful in determining whether a given asking price is reasonable for a given buy to let property.
    As indeed you indicate, John, with your 1% rule. This also has the benefit of being dead easy to work out for the mathematically challenged such as myself. If a property can be rented at £500 pcm then it shouldn't cost more than 50,000 to buy.
    Of course the trouble is in practice there seems to be virtually nowhere in the UK that this rule applies at current market rates. Average monthly rents everywhere I've looked are considerably less than 1% of average asking prices. Which serves to clarify starkly the absolute necessity of buying at BMV.
    I certainly agree, Roberta, that following this type of formula inflexibly sounds like a recipe for disaster. On the other hand, as John says, it does seem useful to have a filter by which large numbers of properties can be quickly and confidently eliminated as too expensive, otherwise you surely end up spending more time than is advisable analysing deals that are utterly without merit.
    Food for thought as always...
    Cheers, Bruce
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    Interesting that you should mention Bristol specifically Richard, as it's one place I picked out as possibly worth further investigation. I wouldn't be hoping for 12% personally, although I hear that double figures is still achievable in parts of Scotland. My aim initially would be something that would still pay for itself at a 9% interest rate. That should show a reasonable profit now and some resilience to troubles ahead.
    It's just strange when I come across these mantras that seem so impossible. I sometimes wonder whether professional investors are inhabiting some different planet to myself where outrageous options are available that are somehow hidden from us beginners. There's probably some truth in that, plus a tendency to exaggeration from some of the pros who would prefer to maintain an air of mystery and magic about what they do. At least that's how it looks to me.
    If I hear one more mention of 'property secrets' I'm going to./.. well, that's a secret.
    B
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    Re: High yielding properties.
    The highest yielding properties always seem to be the cheapest.
    A developer buddy recently asked me to do some research into a property that hadn't sold at auction. The flat was just an 'in' to a development opportunity - long story. It was a top floor studio flat (box) above a Carpetright, so not very appealing on first site but close enough to a tube station to make it a good rental. The yield on this was a whooping 15%.
    PS: Several hours and umpteen international phone calls later I discovered the reason it hadn't sold..the (invisible) freeholder was about to start work (just as the planning was about to lapse) on a new storey of five new flats - exactly what we had wanted to do, bugger!
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    Rich,
    If you believe interest rates will be 9% how many years would you lock in for using today's fixed rates of 5%+ 5 years, 10 years or longer?
    John Corey
    https://www.ChelseaPrivateEquity.com/blog
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    REI said:
    Rich,
    If you believe interest rates will be 9% how many years would you lock in for using today's fixed rates of 5%+ 5 years, 10 years or longer?
    John Corey
    Good question John.
    I'm thinking it's a matter of striking a balance between the actual interest rate being charged now against the anticipated increase. If I could find an attractive enough rate I would lock in for 20 years - I would be happy to be able to offer my tenants protection against interest-induced rent increases. Besides I don't see how rates can be much lower than at present on an ongoing basis, so fixing now for the long term makes sense from that POV.
    But who will sell me a 20-year fixed rate interest-only mortgage at 5%?
    Cheers,
    Bruce
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