I have an amount of money sitting in investment bonds, they have been there for approx. 3 years and are currently yielding 5%.

I’ve thought for a while that property maybe a better long term investment, i could for instance buy two flats in my area for the money i have.

I will be paying cash for them so no mortgage woes to deal with.

With the local rental prices versus investment i’ll make 6.5%- 7% yield.

I plan to buy property that will need mostly cosmetic work doing on them.

Also with property i may have the double bubble of the price going up in the future.

Please give me your thoughts, feel free to offer all sorts of advice.

do your sums based on getting 9 months rent a year

Well done you.
(I know this isn’t a help, but I don’t like my current money-grabbing landlord: by requesting we have 24 hours notice before she barges in, we’re “difficult”…)
Respect your tennants, it’s not an easy buck.

And factoring in all the unseen costs such as ground rent, maintenance, the cost to find the tenant (advertising, credit checks etc or the managing agent’s finders fee) and then ongoing management fees and landlords insurance.

You should also factor in the risk associated with holding the properties as assets. A good return is relative to the risk you’re taking. By holding bonds, you a) have no work to do b) depending on the bond the risk price has been factored in and c) have a relatively liquid investment. Residential property, especially flats, is a very risky asset class right now.

If you’re making 6.5-7% I think you would be doing amazingly well in absolute terms, but supposing you genuinely can make this (having factored in all those costs) is the added risk worth it?

5% is a good return for nothing. For BTL you need to be nearer 10% gross to make or better that 5% interest, depending on the type of house/tenant etc.

It is ROCE that you need to think about. Google that. Basically you need to not own 2 flats but have (say) 80% mortgages on 10 to maximise your ROCE.

Not sure what you have factored in. But dont forget tax on the income (i.e.20 or 40% depending on what you earn of the profit minus costs), and 20% capital gains tax when you sell the property.

6-7% would not be worth the hassle for me if you already get 5%.

You may be able to rent your house to the council which is lower rent, but takes all the hassle out of it (no maintenance, no empty periods, no finding tenants, no dealin with tenants)and is guaranteed income for 3-5years.

Try the direct gov website. Lots of stuff there to read.

Im afraid there’s no way you’re making 6.5-7% income yield on a proper net initial basis.

Outside of london it’s hard to make more than 4-5%. In London it’s about 4-6%, but it’s a higher demand/more liquid rental market.

To get a proper income yield, take gross rent, less agent’s fee, and at least 2wks if not 4wks rent void p.a. Allow for landlord’s buildings insurance premium of say, £100-200 pa and a further £100 for gas safety inspection. Divide by purchase price/cap value divided again by 1+ % transaction costs (legal fees and SDLT)

So for my flat in London:

£350pw = £18,200 pa
Less 8% agent’s fee = £1,456 + VAT = £16,452
Less 1month void pa = £15,052
Less service charge (including insurance) = £900
Less Gas safety cert = £100
= £14,052
Flat value = £290,000
Gross yield = 4.9%
divide by (1+3%)
= 4.7% Net yield

That is of course just your income yield, changes in capital value will adjust this for your total return.

If you had enough money to buy outright two flats, you would be better getting 70% mortgage on multiple flats. Buy to let mortgages are about 3.8% right now. You could potentially earn double the amopunt you pay in interest from rental income.

Lots of maths, but worth working it out.

Stoner – house in town just outside London, on your figures I am on 9.4% gross. It is achievable, but its not easy.

All above advice is very valid but let me through this in the mix:

Yields should reflect the quality of the property / tenant. If you dealing in student digs, this would be low quality, loads of hassle, high risk and therefore you would want a +10 yield (covering cost but the additional income to cover your time and the hassle factor).

If you have a quality property that would appeal to better quality tenants (long term / good payers) then you would expect a lower yield (more demand for easy to manage stuff = higher price = lower yield).

This concept underpins the whole property market from commercial £100m+ stuff down to crap resi. There is also the lot size factor. There are loads of people working the lower end of the market and demand tapers off as the value goes up, people are priced out. This leads to lower yields for smaller affordable lots and higher yields for big ticket deals.

I am on 9.4% gross

Id double check your capital value, you may surprise yourself with current prices.

Your rental yield figure depends on the price you pay for the property.
If you look at the typical prices in estate agents then the return on rental at these prices are negligible.
You have to be looking at things like auctions and repossessions to try and get the property at the lowest possible price.This means you are buying at the lowest possible price so if property prices do rise then you have extra yield on the property.
If you can do most of the maintenance yourself its a big bonus.
Employing tradesmen to do virtually everything will slash your income from the property.
I wouldn’t look at any property that gave less than 8% gross and it would have to have potential for growth in its value.

Based on your current returns from your bonds, id personally only be moving that amount of money into property for the (potential) growth, and you’ll have to make your own mind up on how much of that there is gonna be.

I don’t get it, are you suggesting it may go up or down?

stoner where on earth are you paying 100 quid for gas certs.. i do 3 properties for that!!

stoners and others facts are of course hard nose but get the right property and tenants and you can really spin the wheel..

buying now in a stagnant flat market is sound advice, distress sales are the way forward, estate agents email them letting them know your a cash buying willing to consider all property under x and they ll fall over you negotiate on price and completion like you dont want the property but do want to move in tomorrow when you ve agreed the price exchanged go back and haggle harder

every buck you can make on resell is worth the effort but is a long term earner.

buying on mortgage is another opportunity 70% down would turn your 2 properties into 3 making the money work harder.

buy them close together within a mile or so and make the deals sweet, tell the spark and gas man that he can do all three for the 100 quid the three etc and you can really move your costs down.

sure it ll be more involved than going online to see if your still getting 5% but the upside is a decent pension pot.. which is what mine are..

I think my gas cert cost £60-75, but I rounded up as there’s always misc costs that creep into your return. I havent trawled my invoices for the sums, was just trying to be indicative.

Also, for my work, Ive done a lot of work on effective income yields in London. Im happy with the figures of c.4.5-6% net.

As you allude to there’s a difference in sweating a small portfolio hard, making one property work, or handling a 20+ portfolio.

Ever heard of the word “gearing” ?

If you want greater yield get mortgages and buy more properties. It’s called gearing and it’s what the savvy investor does all the time. Using stoners figures:

Purchase Price 290000 290000 290000 290000
Deposit 290000 125000 90000 40000
Mortgage 0 165000 200000 250000
Rent 18200 18200 18200 18200
Costs 2516 2516 2516 2516
Interest @5% 0 8250 10000 12500
Yield 5.40 5.94 6.316 7.96

So you can see on an investment of 125K you can make 5.9% pa. If you reduce the deposit to 90k then you make 6.3% pa etc.

edit how can I get the forum to space my lines properly???

I have a btl in SW London & net about 4% yield. TBH the yield isn’t that critical, it could be 4.1 or 4.4%, but the smart money is in the capital appreciation, which in a flat mkt (no pun intended) has delivered 4% pa & that’s on a quick sale price.

So 4% yield + 4% cap appreciation = 8% & thats over the last 5 years.

Sadly I am a buyer not a seller so my next one I have to pay top dollar for.

I have looked at loads & can’t get over 4.5% yield.

Of course the problem with gearing is that if prices go down you lose all your money so it is a far more speculative investment compared to a bond and therefore the return needs to be higher to compensate the risk. There is certainly a scenario where property prices will have another slump, at the moment many mortgage rates are negative in real terms, once this switches a lot of pressure will be brought to bear on family finances. The hope is by this time, incomes will be growing, if this hasn’t happened then a property slump is likely.

mefty. How is your objection different to the downside if you have no mortgage? If prices go down you still “on paper” lose money..

better version of my numbers above

The issue is that most btl investors will only lend to 70%
so the minimum you can invest in this case is 87k.
I would go outside london where you can buy letting property at 250k yielding 19.2k pa gross. I’ve been doing it for 10 years and never had a void period, but then I have a secret niche that I’m in..

so the figures for the kind of stuff I’m talking about are:

And that’s including stoners 1 month void..
Which probably accounts for the repairs.

So in your 290K with 90K of equity case, an across the board reduction in price would lose you 29K, if you had bought just with 90 you would lose 9 so you lose three times the money. Obviously if it goes the other way, you make three times the money – that is why it is called gearing.

yeah but you’ve only lost that money if you sell at that price. As long as you are making rental yield who cares. If you have been silly enough to expect to make yield from capital gain over the short term then you are crazy.

Also if you do “lose” this 29k off your 90k investment then after 3 years holding you will have earned it back in yield.

I’m not thinking of gearing as a panacea, but it does have lots of useful upside.

ah well mf, you need to find someone you can trust to do your thinking for you…..

Yeah – someone else can think. I will draw pretty pictures.

Well pictures.

Just.

But what if interest rates have gone up and you lose your tenant, you suddenly have to find the cash to meet your loan repayments and you have not got the money to do so. You may not have a choice about selling.

All I am trying to do is explain the downside to ensure some balance. A downside that many BTL investors have been hit by in the recent past. Gearing up an investment increases the risk and it is important to understand this. It is not a one way ticket to infinite riches.

As above I’d use a mortgage, which keeps a large amount of your capital free to use to either buy other property or invest else where.

Also you can claim tax releif ont he interest payments, somehting you cannot do with a residential mortgage.. Maybe use some of the money to pay off your residential mort?

ah, gearing.

You should see Stoner’s special gearing graph, aka, “The Trumpet of Possibility”

I’ll dig it out sometime, coz I know you chaps love my graphs 😉

Have you done one of those nice fan graphs like the BoE use? I like those

seen it stoner. Like it.

that’s just a representation of a normal distribution over a time series mefty.

nah, trumpet of possibilities shows the relationship between return and gearing for a series of nominal project performances.

Y tends to +/- infinity….FTW!

I know what it is, yours sounds a bit dull, I could knock one of those up, I was hoping for something interesting with a probability aspect hence showing a fan curve.

Ive done stochastic charts before (have you ever used Crystal Ball?), they’re fun, but ultimately useless because the inputs are usually rubbish 😉

I want to see some animated three dimensional stochastic charts. Maybe with moving colour bands. Oooooh……*rubs thighs*

No I tend to do keep my stuff very simple, which is fine as it is single project. People can disappear up their you know whats on this stuff. I prefer a simple tool where everyone understands the flaws rather than a highly complex model that is more difficult for people to interrogate.

But I like a pretty graph!

absolutley. I rarely produce graphs for the client’s benefit. Theyre usually just a technical exercise for my own frottage.

I would never buy a BTL that starts off with less than 10% yield. That would be just stupid.
I think my average is ~15% (but that was based at the time of purchase and not current prices).

(Similar to somebody I know who had to pay money towards his BTL each month).