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  • Property Yields

    Which property type offers the best potential for yield?

    Following on from the thread - Which property type offers the best potential for capital appreciation? - I thought it might be interesting to ask the same question about yield.

    Some breaking news on this topic:

    Rents rose strongly last month as demand outstripped supply, according to Countrywide.

    The average rent for newly let properties in the UK was £883 pcm, up from £859 in January 2014 – an increase of 2.8%.

    One and two-bedroom properties saw the biggest increase in rent, up 8.5% and 3.6% to £751 and £810 respectively. Three-bedroom properties rose 1.6% to £930, but four-bedroom plus properties saw a 3% decrease to £1,345.

    The largest regional increase in rent year-on-year was in Greater London, up 10.6% to £1,265, followed by Wales, up 6.1% to £666, and the south-west, up 4.1% to £765.

    The only region to see a decrease in rent year-on-year was the south-east, down 4.1% to £1,035. Countrywide put this down to a fall in demand for rental accommodation as more tenants moved out of the private rented sector and bought their own homes.

    Countrywide’s monthly index is based on an analysis of 60,000 rental properties.

    [Image: image1.jpg]

    Source/full story

    So, my chart would look something like this in terms of yield potential for private (not LHA) rents:

    1. HMO

    2. 3 bed house

    3. 2 bed house > See "Terraced homes are the landlords's favourite"

    4. 1 bed flat

    5 2 bed flat

    Happy for people to challenge my assumptions, as that is all they are!

    As many of you know, I am not a big fan of flats outside of London.

    10 reasons to buy a house rather than a flat ... every time

    What property type do you think delivers the highest yield and why?
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    very interesting stats and numbers Vanessa.

    On this note how do you see Studio flats?
    Can we align them with 1 bed flats? or do they follow a different trend?

    As they are cheaper it looks easier to find decent studio flats closer to tube and good locations,hoping they will appreciate quickly.

    What do you think about that?
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    (12-02-2015 12:04 PM)JackUK8 Wrote:  On this note how do you see Studio flats?
    Can we align them with 1 bed flats? or do they follow a different trend?

    If you invest in the LHA market place studios outshine 1 beds on yield as the LHA rate is exactly the same. I bought some studios over a decade ago as they offered 12 -15% yields as opposed to the 1 beds which then offered around 10%
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    Jonathan Clarke. http://www.buytoletmk.com

    Good question!

    Studio flats are a curly one.

    They have very limited appeal to both renters and buyers imho. Lenders are not too keen on them either.

    So I would put them quite far down on my list of being "desirable" and I don't think the yields are anything to get excited about either. Smile
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    Hi Vanessa,

    The following is only my experience over the last 20 years. Starting in 1993, we had two properties at the extremes. One seven bed HMO in Cambridge and one 4 bed exec detached in Aberdeen. Both had a gross yield of 16.5% at inception. Sounds great now, but that was when mortgages were 10.5%. Over the years, we slowly built on those two. With the capital appreciation from 1998 to 2003, both nearly doubled in price, and the rents actually fell. So the exit yield on one was about 11% and the other was about 7.5%. Around that time, we had bought three two bed terraced houses in the North West (where we chose to live after returning from overseas). Yields on those were initially 13% to 16%, but interest on mortgage was falling rapidly. By 2006, due to capital appreciation, yields were then around 7%. Since 2006, we have owned one four bed exec house whose yield was initially 5.4% and is now 3.6%. However, it is the only property in our portfolio that is worth more than it was in 2006. All the rest (new build flats 5.7%, mature 3 bed 6.3% and 2/3 bed terraced houses 6.5% to 8.1%) are valued at less than their 2007 purchase price.

    Gross yield is only useful when calculating interest cover (theoretical, to ensure that mortgage terms are covered). It is net yield that is important to cash flow. It is my preference (and future plan) to replace the lower end terraced houses (typical rent £400 per month) with mid market 3 bed houses (typical rent £800 per month) on a ratio of 2 to 1, simply because there are half as many boilers, roofs, gutters, windows, floors and rooms to be maintained.

    The two threads run hand in hand, because the measure of success of the portfolio is a combination of net yield and capital gain (or loss). Hindsight is a wonderful thing, but if I had my time over again, I would have bought far fewer properties, in areas of low LHA but high working tenant demand, generating half the effort for the same capital invested and the same mortgage debt (or less). That is not to say this is right for everyone. For a budding new landlord, cost of market entry is the biggest hurdle to get over, and that is why I think the majority of landlords start with terraced houses (on paper, with the highest yield), experience the positive cash flow from the outset, and continue repeating the process. However, once a gross portfolio value has been established, objectives may change as our own objectives have. There is also the spread of risk to consider. At the extreme, an investor who spends, say, £70K on a 2 bed terraced property with £20K savings will be on a path to 10 properties relatively quickly. At ten properties, the impact of a disaster can be managed. On the other hand, a landlord who invests in two £350K properties at lower yield will not only have to wait a lot longer to find around £100K of capital, with two of these compared with ten at the other end of the scale, a disaster may become unrecoverable.

    In conclusion, whether or not high yield or high capital growth is the goal, its the sum of both that matters, and I would always prefer yield over capital growth. The former is cash in hand every month. The latter is hopium. At this moment in time, I would have no problem buying a terraced house for £70K. I would have a problem buying a £350K 3 bed property in the South East. The reason is that capital gain could very easily become capital loss. Our experience between 2007 and 2010 is that we have had as much as £750K wiped off our balance sheet. An estimated 19% fall across the entire portfolio. From hero to zero in a very short space of time It's only paper money, but if we decided to exit the property market, that paper money could quickly become real money. A reminder of the dangers of gearing.
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    Stephen Johnson, M.D. of Shawbrook Bank has sent this comment:

    Certainly the HMO property group offer the highest gross yields, but investors need to focus on net yield after the higher than normal costs (sometimes these properties are offered serviced with all inclusive rents of utilities and broadband etc.), as well as being confident there is sustainable and underlying tenant demand. Remember the higher the yielding properties are often the more risky ones!
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    2 bed maisonettes are the best yielding properties in my area.
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    Mid terrace props all day long. Possible to achieve 9% gross yield. 50-55k purchase price. £110 pw in rent on a standard 2 bed mid terrace. Rental deman very high. Bread and butter. If you buy an ex council house - like I did 12 months ago. Yields are even better. 3 bed mid terrace fully refurbed and after all costs - came in at 63k. Rent £475 pm. Not bad for a straight forward hassle free AST.
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    (17-02-2015 12:32 AM)DaddyLandlord Wrote:  Mid terrace props all day long. Possible to achieve 9% gross yield. 50-55k purchase price. £110 pw in rent on a standard 2 bed mid terrace. Rental deman very high. Bread and butter. If you buy an ex council house - like I did 12 months ago. Yields are even better. 3 bed mid terrace fully refurbed and after all costs - came in at 63k. Rent £475 pm. Not bad for a straight forward hassle free AST.

    hi DaddyL.

    what are are you talking about?
    thanks.
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    DaddyLandlord

    Those are healthy yields.

    Please can you highlight, which area are you purchasing in and also has there been much (if any) capital growth over the last 24 months?

    Thanks
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    (17-02-2015 09:48 PM)2 UP 2 DOWN Wrote:  DaddyLandlord

    Those are healthy yields.

    Please can you highlight, which area are you purchasing in and also has there been much (if any) capital growth over the last 24 months?

    Thanks

    I invest mainly in the Northwest. Mainly Bolton to be precise. Capital growth- none to minimal... But buy BMV where poss...

    (18-02-2015 01:04 AM)JackUK8 Wrote:  
    (17-02-2015 12:32 AM)DaddyLandlord Wrote:  Mid terrace props all day long. Possible to achieve 9% gross yield. 50-55k purchase price. £110 pw in rent on a standard 2 bed mid terrace. Rental deman very high. Bread and butter. If you buy an ex council house - like I did 12 months ago. Yields are even better. 3 bed mid terrace fully refurbed and after all costs - came in at 63k. Rent £475 pm. Not bad for a straight forward hassle free AST.

    hi DaddyL.

    what are are you talking about?
    thanks.

    I am talking about properties with potential for decent yields... :/
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