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  • Property Yields

    Rental Yield

    We all have our own business model for what makes a property worth buying to let, but I was wondering what rental yield landlords consider necessary to buy a property to let or if some landlords would ignore rental yield in anticipation of house price inflation.  I would also ask if you could say what area you would invest in.

    I am wondering about the above as if I look at my properties I am not convinced it would make sense to buy them at current prices but there are other  landlords still buying in the area.

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    P.R.A needs your rental income to be 145% of your mortgage .

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    ... if your mortgage rate was 5.5%.

    I look for 7% rental yield with any price growth as a bonus. Around here prices have only just passed the 2007 peak.

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    Hi Peter

    Is there a recommended / popular calculator tool that everyone on here uses to calculate Rental Yield? I'm still new to all this, so still not really sure what Rental Yield means, I Googled and saw this:

    > Rental Yield is your client's annual rental income expressed as a percentage of their property value.

    But that is gibberish to me, it sounds very abstract. Why is Rental Yield important? How exactly is it calculated? And as an example, if I buy a property for £60,000 and spend another £10,000 on refurbishment, and then rent it for £500 a month, what would be the Yield and what would that number be telling me?

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    This is one of the basic calculations for property and you should get to grips with it, even if you choose to measure your portfolio by some other means

    So, for your example.  If you buy a property for £60k and spend £10k on refurb, you are into it for £70k.  (For now we will exclude SDLT and legal costs, assuming they are included in the £10k)

    If your rent is £500 pcm, that is £6k per year.

    The annual yield is £6k / £70k = 8.57%

    What that number tells you is for you to decide

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    Thanks for the clarification Pipllman, What does SDLT mean?

    Also, what other things can I deduce from that percentage? What else (if anything) does it tell me?

    Finally, when Cash Flow is super important (cause all my savings would go into this), what is the minimum rental yield percentage one should deem acceptable?

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    Stamp Duty Land Tax (the tax you pay when you buy a property > £40k)

    On it's own, the yield doesn't really tell you much.

    Cashflow is important, but remember property isn't just about cashflow - especially when you are putting all your savings into it.  Think about possible future changes in value, maintenance costs, service charges, the type of tenant you might attract / retain, what happens to any mortgage you may have (or wish to have) on the property.

    You might be well advised to spend a couple of hours looking round this forum to learn more from the many knowledgeable posters here that give hugely valuable information away for free.

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    I focus on ROI on the cash far more than gross yield as some properties come with service charges etc. which can change the ROI a lot. I look for 6% as a minimum but i hear 7-8% a lot more often.

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    I'm similar to Darren in that I use ROI instead of yields, but my figure is generally 5.5%, although if the property I'm buying comes with parking I'll sometimes lower my target ROI as I usually rent out the parking spot seperately

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    I would not ignore rental yield but its position in the pecking order may be adjusted downwards if other factors come to the fore to make a deal worthwhile

    Anticipated capital growth would be one such factor but its never a certainty so its also important to buy at a discount and  also be able to  add value

    But its getting the balance right  across all criteria which is the skill

    On 100k property to make an extra 1% yield could equate to say an extra £83 pcm = £1000 pa

    But if you bought 10K under market price and spent 10K and added 20k value that`s worth 20K to you on paper

    Do you want to wait 20 years  until that extra 1% yield makes you the same as the two other factors - BMV + add value

    That kind of return return can be created within 4 weeks of purchase not 20 years

    Then that value can be either used straight away or stored and used later at any point at a time of your choosing in the next  20 years

    It may even get you that extra 1% rental yield then because of the works you`ve done

    Capital growth is great but its a slow burner

     I would  want all four positive criteria at the same time in a deal.

    Use your own  individual arbitrary scoring system to help decide

    BMV + adding value + capital growth + rental yield  .

    Four bites at the cake

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    Jonathan Clarke. http://www.buytoletmk.com

    I use a spreadsheet that gives me my return on cash invested (ROCI).  This is as it says on the tin: % return on cash I have left in the deal. I take into account (with some examples)

    Purchase price + purchase costs (e.g. solicitor, surveyor, SDLT) e.g 100k + 4.5k

    Mortgage at 75% of purchase price (assumed) 75k

    Any refurb etc: 10k

    This gives cash left in. = 25k+10k+4.5k = 34.5k

    Income (e.g. 650pcm)

    minus

    Voids 5%

    Repairs/maintenance 5%

    Agent's fee + VAT 12%

    Mortgage interest + fees (4.5% on 75k)

    Insurance   200pa


    Whatever is left over after all the above = cash return, say 2600 pa

    So, ROCI for the above = 2600/34,500 = 7.53%

    You decide what ROCI you need. My spreadsheet goes green when ROCI is above 10%, though I don't strictly follow that (learnt a lesson from not investing in an area a couple of years ago that has since had 20+% capital growth).

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