Yield

[MarkJ]

Another idiot question (sorry guys)

The usual way fo calculating the worth of a property seems to be a simple rent annual divided by cost of the property. Correct?

However, where does the size of the mortgage against the property come into this calculation, as well as the cost to service the mortage and the deposit paid against the property?

How do you factor all of the above into this?

I'm just tying to work out how to evaluate different options ?

(bigger deposit/smaller mortgage = easier to balance monthly rent received v. cost but means more dead money in the deposit ????)

Sorry for the idiot questions today......

[Trenners]

Hi Markj,

As you say -

YIELD = ANNUAL RENT / PURCHASE PRICE - it is that simple - and is probably the best way to decide whether a buy-to-let investment "stacks up". Loan to Value (LTV) - otherwise known as GEARING = MORTGAGE / PURCHASE PRICE. This will show how exposed you are if property prices were to fall. The higher the gearing the higher the risk and the bigger the gambler you are.

I am geared at 57% at the moment - I know a lot of investors are geared at about 80% and some are geared at 90%+. Property prices only need to drop by about 15% for the 90% property gamblers to fall into negative equity.

To reduce gearing you need to increase the deposit because this will have the affect of reducing the required mortgage.

Hope that helps ....

Mark

[MarkJ]

Trenners, as usual, a big thank you. Your contributions are always a help.

As I mentioned in my original post, a higher deposit means more 'dead cash'. But I suppose from what you are saying, is that this 'dead cash' is the pay off for 'safer' gearing.

So if I had £30K cash the recommendation might/could be 'use it all as a larger deposit on one property at (for the purposes of example only) £100k rather than two £15k deposits across two at £100k each'?

[Trenners]

Hi Markj,

The higher the deposit - the safer the gearing - the less properties you own - the less the gamble.

The decision on whether to buy 1 or 2 properties with a £30K deposit really does come down to your attitude to risk. If you are able to buy a couple of properties below market value then your gearing will be lower.

2 properties are always better than 1 because if 1 is empty you hope the other is let. 2 properties also give you more exposure to capital growth but also more exposure to capital depreciation !

The biggest problem for any landlord is if they get themselves into a situation where they are forced to sell because they are unable to keep up their mortgage repayments because the rent is not covering the mortgage and they do not have the funds to cover the shortfall.

Good luck,

Mark

[Matthew]

Hi Mark & Mark,

MarkJ - there are so many ways in which to answer this question, I will try my best.

Firstly some LL's buy in property hotspots for capital growth and don't worry too much about yields. I see this a high risk.

I go purely on the yeild, and try and buy the property which has the highest possible yeild.

If you are doing an HMO, you should be able to get at least a 10% yeild. My advice borrow as much as you can. It is likely you may only be able to borrow up to 85% on HMOs as lenders are more strict. If you can get 90%, I would go for it.

What does this 10% yeild mean? Well it means that you will be making quite a healthy profit if int rates are only 5.5%. It also sheilds you againt increases in interest rates - If they went to 10% you would pretty much break even. The higher the yeild, the less risk, and the more profit.

What this also means that you should never have to sell the property, you will only sell if and when you want, which is when it makes financial sense to. For example if int rates were at 10%, many LL' with 6% yeilds will be in the Sh*T and have to sell when prices would be at rock bottom. You will not have to and can sit tight, hopefully making a profit if you fixed you rate!

I will reply to you HMO query tomo,

Ciao!

[MarkJ]

Returning to an old thread;

1) What should a LL's target yield be, for say a 2/3 bed semi - one family?

2) How do you factor the size of the deposit into your calculations of a BTL deal's worth ?

3) In a yield calculation, does MV rather than purchase price have any significance?

4) I can get 6.3% AER in a savings account. Where do you factor this into valuing a deal? Yield? Deposit? Mortgage rate?

Mark

[Preston]

Hi Mark

It sounds like you need a financial evaluation model to help you decide how and when to invest. I understand that there is software available to help you do this; type in buy to let in your search engine and a few options will come up. I use a fairly basic spreadsheet which I can talk you through if you are interested.

Good luck

[Simon Dewsberry]

i would be looking at 10% min yield at this time !

Also you will need to factor in LTV offered by lenders AND min accepable rental figs to lender ....so the equation needs to be adapted to take these in consideration as well ...........right now you really need 25% depp to get a workable M deal ......which will in turn affect your over all calcs

The Rodent