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  • Property Yields

    Spotlight on yield and cash flow - top resources to help you measure and manage!

    There is an old adage in business – turnover is vanity, profit is sanity, but cash is reality.

    This is true for property investment.

    The only way to win in property is by mastering the numbers! Therefore we all need to become Gurus on the topic of yield and net cash flow. Smile

    [Image: quote-happiness-is-a-positive-cash-flow-...337138.jpg]

    When purchasing an investment property, there are two metrics to consider:

    1. Capital appreciation

    2. Month on month net cash flow (yield).

    Capital appreciation can happen through the passing of time and a rising market, and it can also be "forced" through refurbishment and development. In very basic terms it should be considered highly speculative, as it is only real money when that money is in your bank account! Property prices can, of course, go down as well as up.

    However, month on month net cash flow - the money received into your bank account after the mortgage and all expenses have been paid- is very real money that can feed your family. It can also be "passive", meaning that it comes in month on month with relatively little effort on your part.

    Yield can be calculated and numbers never lie! This means you can achieve a true picture of how your investment stacks up.

    Therefore, it is my belief that, for safe BTL, you should always focus on No. 2!

    It allows you to remain in the game long enough to benefit from No. 1. Smile

    4 things good cash flow managers do consistently:

    1. Project, plan, and measure cash flow.

    2. Improve receivables (rental income).

    3. Reduce payables (negotiate on bills).

    4. Save to cover shortfalls, future needs, and emergencies. (Contingency).

    Here are some of Property Tribes top resources to help you understand and find yield:

    Dummies guide to yield

    Numbers never lie!

    Best type of property for potential for yield

    Hope this might get us all doing our sums

    Rental yield illusion

    Numbers do not lie. Truth and integrity when negotiating

    Aspects of property investment that remain constant despite market conditions

    Is it a numbers game?

    The North vs. South "yield" divide

    What is the minimum yield you would consider?

    You know to walk away from a property deal when ....

    The £1,000 passive income question

    Question on yields

    What yield to aim for, for "vanilla" BTL?

    Warren Buffet's genius insights

    Capital growth vs. cash flow - how to get a balance?

    The "Hovercraft" approach to property investment

    Realistic income per £100K invested?

    A masterclass on how to value a property correctly

    Remember: you want to be on the right hand side of the "cash flow quadrant", developing a passive income that delivers each month with little effort on your part.

    [Image: Financial-Quotient_10.jpg]

    Recommended books:

    "What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures" by Frank Gallinelli

    "Rich Dad, Poor Dad" by Robert Kiyosaki

    "Cash Flow Quadrant" by Robert Kioysaki
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    I would like others to help me develop this topic. Smile

    I think the general belief is that landlords have to make a choice between capital growth and yield i.e. that they rarely occur together.

    Most landlords say South for capital growth and north for yields.

    I have always focused on cash flow rather than CG, although most of our stock is in the South. The CG has been the cherry on the cake. Cash flow is the lifeblood of any business, and that is why I believe it should ALWAYS be the priority. Without cash flow, you don't have a sustainable business imho.

    However, I have just read an article that claims that Liverpool and Manchester are two cities that are currently enjoying great capital growth and good yield.

    What is the tribes view on this? Can you have your cake and eat it?!?
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    (24-02-2015 11:20 AM)Vanessa Warwick Wrote:  Can you have your cake and eat it?!?


    Yes I believe you can. Even a dog of a property will double in value within 25 years. So focus on leveraging and cash flow (unless you love your job have an excellent salary and want to work for the next 25 years ) .

    These high yielding properties produces real time income every day/ week / year to supplement your wage then replace your wage enabling you retire financially free hopefully well before that 25 year mark.
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    Jonathan Clarke. http://www.buytoletmk.com

    (25-02-2015 11:11 PM)Jonathan Clarke Wrote:  
    (24-02-2015 11:20 AM)Vanessa Warwick Wrote:  Can you have your cake and eat it?!?

    I think an investors age has an effect in the yield v cash flow question, but with the right property both should be achievable.


    Yes I believe you can. Even a dog of a property will double in value within 25 years. So focus on leveraging and cash flow (unless you love your job have an excellent salary and want to work for the next 25 years ) .

    With respect Jonathan many dog properties will not be standing in 25 years time

    These high yielding properties produces real time income every day/ week / year to supplement your wage then replace your wage enabling you retire financially free hopefully well before that 25 year mark.

    Not everyone can handle this type of property and tenant

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    (25-02-2015 11:36 PM)Landlord Geoff Wrote:   With respect Jonathan many dog properties will not be standing in 25 years time

    Not everyone can handle this type of property and tenant

    Hi Geoff

    We would have to define dog of a property I guess . I dont know the figures but I believe it would be a very small percentage actually fall down .One of what I would call my dog properties - ex local authority non standard and relatively poorly constructed has tripled its price in the last 15 years. If in the unlikely event it did fall down the rebuild cost from the insurers would cover it and I would get in effect a brand new house worth considerably more . Or if the council regenerated the area I would get a healthy price under the compulsory purchase scheme. I don`t see a realistic fear here to be honest in the vast majority of cases

    I believe it is wrong to set to much store by - its got to be a cash flow model or a capital growth model. Its what people talk about but the lines are very blurred in my view . They both can comfortably exist side by side with acknowledged slight adjustment maybe but if you buy well the capital growth can give the cash flow part of your business model a good run for its money.

    I agree not everyone can handle that type of tenant or property. And thats where an agent steps in. I have clients who have never been to their properties or met their tenants. They handle it from the safety of their retirement villa in Spain. And good luck to them.

    That costs them 10% of their profits but they recognise the business model of the LHA dog property market. You can easily make 50% more by buying a few raw mean Rottweiler type properties give 10% of the profits away to an agent and not get involved at all if you dont want to. You are still 40% better off than if you had invested in a posh pedigree King Charles Spaniel type estate.

    Woof :-)
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    Jonathan Clarke. http://www.buytoletmk.com


    I go for cash flow all the time as like you said capital appreciation will/should follow.

    But I'm not willing to play the capital appreciation game as cash every month is what pays the bills. You mentioned the Liverpool market for capital appreciation. Y

    es there is appreciation, in certain areas but only to the mid 2007 levels. Some areas have passed that level but it's a small parts of Liverpool. However the student market in Liverpool especially Kensington areas of L7 and L6 are very buoyant for cash flow as this is the new Student area.

    Because Kensington hasn't fully matured as a student area yet, especially L6 areas the yields are great. The only downsides are that the revaluation figures don't match what people have bought and spent on the refurbs.

    Example, house bought for £70k. Refurb to 6 bed student property £60k. Total spent £130k.

    After remortgaging, the valuation will only be £90k tops. So you're still £40k down.

    But the income you get from that property can be anywhere from £22k gross a year to up to £27k gross a year. However the way the market is going I think this will change as the area gets more and more of this style of housing/refurbishment.

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    Jonathan “dog properties not standing in 25 years” – I was referring to houses (in my neck of the woods) built early 1900’s in what are now blighted areas and occupied by low income/unemployed.

    Housing standards and construction will change massively over the next 25 years and they will simply be demolished.

    These type of houses are currently offered for sale well below pre crash levels. Even though LHA rates are rising £5 week from April, it is the first increase since 30th percentile which reduced them. In a neighbouring LA they are set to fall by £1.50 month. So we have yield v capital gain v cash flow considerations, but it easy to look at historical data. It’s “horses for courses” – we each have our own modus operandi, and mine certainly doesn’t include the pit bull owning tenants (judgemental I know)

    PS. Vanessa , can we please have English spellchecker enabled!! lol

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    According to new research from Platinum Property Partners, 23% of UK landlords do not measure the return on their buy-to-let investments at all, meaning that £300bn of investment in BTL is left unmonitored, leaving UK landlords unaware of the current or ongoing health of their property portfolio.

    Landlords owning Houses in Multiple Occupation (HMOs) for young professionals and key workers are the most likely to measure their portfolio, with 95% tracking the profitability of their property portfolios in some way. But landlords who let out holiday homes are least likely to assess the returns on their investment – with a third (33%) failing to measure the financial performance of their rental properties.

    Not only is there a significant failure among UK landlords to measure BTL returns, but there is also a worrying lack of consensus about the most effective way to measure the performance of property portfolios.

    Return on Investment is considered the most effective way to measure the performance of all investments, including property. For BTL, it is the only method to take into account gross profit, the cost of the property (including fees and refurbishment) and capital gain. Return on Equity uses a similar calculation so can also be considered an effective measurement.

    However, just one in five (21%) BTL investors measure the performance of their investment using these methods. Over half (56%) of property investors use a less effective method to calculate the profitability of their portfolio, which means that £700 billion* of BTL investment is at risk of not being monitored accurately.

    Widespread confusion and misunderstanding of financial terms

    Not only are landlords using ineffective methods to calculate the performance of their property portfolio, but the vast majority do not fully understand the key financial terms.

    As this research revealed, less than a quarter (24%) of landlords understand the term ‘Return on Investment’: when asked to select the correct definition, 56% failed to do so while 20% were not sure. Landlords letting out flats were the least savvy about this type of financial measurement, with only 8% able to define this term correctly.

    Only one in four (26%) BTL investors can accurately define ‘Gross Yield’; but landlords of HMOs for working tenants (38%) and holiday homes (42%) are the most clued up about the meaning of this term.

    Just 12% of BTL investors know what is meant by ‘Gross Profit’, with nearly three quarters (73%) of landlords incorrectly identifying the definition. Landlords with holiday homes were the most familiar with this measure (25%).

    However, even among those investors who correctly understand financial terms, there was no consensus about how best to calculate the different measurements.

    For example, the most common method to work out a Gross Yield was rental income as a percentage of the property purchase price, cited by 38% of respondents. However, 28% of investors calculate Gross Yield as rental income as a percentage of the current market value of a property, including any refurbishment costs. A further 18% of landlords would measure Gross Yield as rental income as a percentage of the current market value of a BTL property (without refurbishment costs).

    There was a similar lack of agreement in how best to calculate Return on Investment and Gross Profit, suggesting the sector is lacking cohesion when it comes to calculating the investment performance of BTL properties.

    Source/full story

    See also - Auditing a property business/portfolio
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    Useful article about BTL yields.

    Exerpt:

    There are two basic calculations: Gross Yield and Net Yield.

    Gross Yield

    The Gross Yield is the total amount of rental income generated over a year, as a percentage of the property’s purchase price or current value. So the calculation looks like this:

    Annual rental income / Purchase price or Value X 100

    So, for example putting some sample figures in, with a rental income of £550 a month (giving a gross rental income of £6,600 a year) and a property bought at auction for £92,000:

    6,600 / 92,000 X 100 = 7.17% gross yield

    Some property professionals prefer not to use a full annual rental income in the calculation, as the property may not be let for a full 12 month period. Calculating gross yield on, say, 10 months rental income can often give a more realistic figure. So in this scenario and using the same figures from the example above, the calculation would be:

    5,500 / 92,000 X 100 = 5.98% gross yield

    Straight away you can see the decline in yield if the property remains empty, even for a few months.

    Net Yield

    The Net Yield is a similar calculation but takes in to account the running costs and fees (such as ground rents, landlord insurance, letting agent fees) and the cost of maintaining the property (such as renovation work and decorating).

    Let’s assume the running costs come to £1,200 a year, then your net rental income falls to £4,400 a year, assuming the property is let for a full 12 month period:

    (6,600 – 1,200) / 92,000 X 100 = 4.78% net yield

    It’s calculations like these that can help you work out the viability of a property and help you determine if you want to sell a property to look for one with a better return, and to work out which of several properties you own is generating the best return for you. When looking at buying a new property the yield can also help you determine the return you are likely to achieve and so help you decide if it will be a worthwhile investment.

    Full/source article
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    To Make BTL worth it today you need  a yield over 8%

    The more yield the better It will see you through the Bad Times to come

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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.