Yields & ROI

[Richlist]

There have been a few posts recently from people wishing to become landlords and those attempting to buy suitable property.

I just wanted to share a few caculations I've done on my residential portfolio......it might be a useful comparitor for others.

Gross Yields..... = Annual rental income as % of purchase costs ( purchase price + buying costs). Mine ranges from a lowly 6.2% to a higher 17.5% and average 10.1% for the portfolio.

Gross Return on Capital Invested.....= Annual rental income as a % of money invested in the property (deposit + buying costs). Mine ranges from 32% to 66% with one property producing 630%. Average is 52% annual return.....before tax & expenses. Net is approx 25% return.

Not bad for someone who failed his maths GCE at the first attempt.

[chickpea]

Thanks for that, Richlist.

Just one question - which figure is the most important when considering a property?

I saw a huge ongoing row on another forum, where one side accused the other of making up the figures (based on yield) to make their investment look hugely successful...when, in that person's view, most BTL's didn't make anything near a decent return.

I got a "B" in O level maths (yes, I really am that old!) but I get baffled when people roll out a stream of different figures for the profit/yield/return on a property - so which one is the deal-breaker?

[Richlist]

Just one question - which figure is the most important when considering a property?

It might be just one question but there isn't just one answer.

* The clever answer is the one thats most important to you.

* Your lender will have a few important figures that you need to meet....e.g .LTV & often rental income needs to be 125% of mortgage payments etc

* There is: Gross yield, net yield, gross ROI, net ROI etc etc etc.

I think ROI is far more important than yield and net ROI is one of the most accurate measures of true profit.

I saw a huge ongoing row on another forum, where one side accused the other of making up the figures (based on yield) to make their investment look hugely successful...when, in that person's view, most BTL's didn't make anything near a decent return.

Yes I can see how that might happen. You need to know that many of the properties in my portfolio were bought years ago. Property was cheap, large loans were available = small deposits and in the meantime I've managed to get a number of attractive mortgages at 0.5% above bank base. None of which you can replicate easily today.

One property I bought as a repossion from Northern Rock at a knockdown/ givaway price was paid for in cash from a previously agreed bank overdraft facility (with a very low interest rate, So, the only money I actually invested in that property to buy it was the legal costs for the purchase......hence the 630% Gross ROI figure.

[chickpea]

Before I try to do my calculations, does buying costs include insurance/gas checks/ground rent/maintenance charges (for flats) etc? Or is it literally purchase costs (so legal fees, mortgage set up costs etc) only?

Does the value of the property come into anything - or is it only the amount of capital you put into it?

What's the best way of calculating yield/ROI when you're not certain what the rental income will be (ie before you purchase a property and only know what the estimated rental income is)? - if a difference of even £25 per month is the difference between an acceptable yield and an unacceptable one, should you think again?

(I think this goes back to my question on my other thread - which was, is there a margin below which you really shouldn't go? I'm reading a book about property investment at the moment, but it keeps things very basic, by simply saying that mortgage lenders want you to be getting 125% of mortgage payments from rental (as you stated - but which is really only a starting point, surely?)

[Richlist]

Before I try to do my calculations, does buying costs include insurance/gas checks/ground rent/maintenance charges (for flats) etc? Or is it literally purchase costs (so legal fees, mortgage set up costs etc) only?

My gross figures just include buying costs which in the main comprise of legal & loan costs. Most of the other items on your list are regular ongoing running costs & would only be included in net yield or net ROI costs......don't forget to include tax payments in net calculations.

Does the value of the property come into anything - or is it only the amount of capital you put into it?

Only if you are calculating yield.

What's the best way of calculating yield/ROI when you're not certain what the rental income will be (ie before you purchase a property and only know what the estimated rental income is)? - if a difference of even £25 per month is the difference between an acceptable yield and an unacceptable one, should you think again?

1. I have never purchased a property without knowing exactly what rental income it will achieve.

2. Potential rental income may fall within a narrow range so just work out the figures for each end of that range.

3. If £25 makes the difference between acceptable & unacceptable then its the wrong purchase. You need a much bigger margin for error than £25.

(I think this goes back to my question on my other thread - which was, is there a margin below which you really shouldn't go? I'm reading a book about property investment at the moment, but it keeps things very basic, by simply saying that mortgage lenders want you to be getting 125% of mortgage payments from rental (as you stated - but which is really only a starting point, surely?)

Everyones idea of the financial tipping point below which they wouldn't go will be different. There are lots of factors that will colour that decision and the decision process itself is a continuously moving target. Its how you view the balance between risk & reward. As the risks rise and the rewards fall the attractiveness of any deal will diminish.

A few years back none of us were particularly concerned about rental income. It was acceptable in many instances to even make a loss on rental income because the capital values were rising by many £000's every month.

That situation has turned full circle with capital values static or falling in many areas and no increases expected in the forseeable future, rental incomes are far more important as they represent your only means of income from your investment. Therefore minimising costs, maximising income, claiming all the expenses against tax that you can is almost as important as not paying over value for the property.

The economic crisis of the last 3 years, mortgage rates & mortgage availablity, interest rates generally, the housing market and its general direction/ changes etc etc all impact an investors decison.