A couple of weeks ago we asked Upad landlords the following question: What's the minimum rental yield you would expect to gain from a rental property and why?
As the winning answers below demonstrate, the answer to this largely depends on what you want from your investment and what role it plays in your financial life.
They also reflect how the widening disparity in property prices between London and the regions is producing a widening gap in the mindsets and strategies of landlords...
I hope you find our choices useful. We picked the £10 Amazon voucher winners where we thought their experiences could be of the most practical benefit to Landlords. The comments are very much the landlord's personal opinions, not those of Upad.
1. 10% rental yield for a single let...
Tim Harmer - The minimum yield I would expect to gain from a rental property is 10% for a single let. This is because yield is calculated as a percentage of the purchase price but doesn't factor in costs such as the mortgage, estate agency fees, insurance, and refurbishment to name but a few. This is why most investors prefer to assess an investment property against Return on Investment (ROI). Furthermore, landlords need to factor in other costs such as voids and maintenance costs and with interest rates only set to go up, a yield of less than 10% would make the property unviable from an investing perspective.
2. In London around 5% rental yield
Ken Cheong - In London around 5% (although hard to get these days) but it depends on the property. Investors need to consider capital gains as well because these are taxed at a lower rate especially for higher rate taxpayers. it is not only the gross yield that matters but also the net yield after deducting costs like service charges. You need a higher yield from a flat to account for this - about 1% more than a house.
3. Most of my properties I purchase are in low dem areas
Peter - It depends on a few different things. Most of my properties I purchase are in low dem areas. These areas are likely not to rise in value too much over the next 10-20 years. I therefore expect 8-10% return on these properties. I have bought some houses with regulated tenants in. As the rents that they pay are artificially low and I am unable to evict these tenants, I am usually able to buy these houses at significantly below market value. These houses tend to be in better areas and the house prices are likely to rise significantly over the next 10-20 years. I therefore am happy with around a 5-6% return on these houses. The tenants have been there for over 25 years, so the rent always gets paid on time. There are no voids and when they eventually move out, I am able to sell them and take a decent profit as they were purchased below market value. The 5-6% that I receive in rents on these properties doesn't make me a fortune, but it more than breaks even.
4. Think of the type of investment, location and exit strategy
KC - This has a lot for me to do with the type of investment, location and exit strategy. If short term income is the game, you need to be confident of at least a 7% yield as interest rates can only go up at this stage and will leave an ever diminishing profit looking that bit smaller. However if I can hold on for capital appreciation, I would be willing to take a yield as low as 4% inside the M25 of London. This will buffer you against a small rise in interest rates and worse case leave you with a zero net profit each year. The news that London prices are only going up is not new and means that after 5 years a sale will turn a decent profit in capital gains, at little expense and risk along the way. Indeed part of my willingness to take 4% also comes down to willingness to drop rent to avoid vacant periods - the most costly for landlords.
5. To supplement our pension income...
Stephanie Brewis - 4% would be my minimum. I think I take a balanced view of my role as a landlord. Firstly, and obviously, the aim is to increase my overall income. In my case, to supplement our pension income. Secondly the aim is to maintain a clear conscience as a landlord. I balance income with fairness and try to avoid being too greedy. Going for the highest possible yield and continuously raising rents is counter productive, and gets landlords a bad press. I always check the rents of similar local houses and then go slightly below that figure. Over the last fifteen years I have found this method very successful and have never had a defaulting tenant in that time! Obviously I would aim for higher than 4%, but that figure is still a decent return in this climate and can often equate to a good quality property, likely to have a high expectation of capital return. I also do not use agents so no commissions to pay. I am sure this also contributes to my record of very short void periods.
6. A simple ready to rent buy-to-let is not really viable
Max Rapaport - A simple ready to rent buy-to-let is not really viable. Estate agents now tend to allow about four per cent return, but this takes no account of repairs, voids, agents fees, unpaid rent, and other extras which can easily lead to an actual loss. Some specialist student accommodation in blocks is often advertised with higher returns for a limited period, but if that were viable long term why would these be sold rather than kept for rental by the developers themselves. There are ways of getting some buy-to-lets to work, but these involve improvements and alterations to the properties which are themselves uncertain. Likewise reliance on increase in property values to sell on. I would see ten to fifteen per cent gross as a basic minimum requirement to cater for eventualities, but this is seldom, if ever, achievable nowadays. The profit margin has been squeezed out of the market - Beware!
7. Not less than 9% rental yield as a long term investor
Nigel - I would not accept anything less than 9% as I am a long term investor. As a result of the financial crisis property price growth will be much slower than previous trends (20-25 years instead of 10-15 years) so these properties have to pay for themselves for an additional 10 years. Overall borrowing costs have historically averaged out at around 7-8%, so when interest rates rise (which they inevitable will over the next 10 years) 9% is the minimum yield required to keep the average rental property in the black. Otherwise you will be subsidising your portfolio in the hope that capital growth will pay dividends - very risky strategy!
8. It's all down to your personal circumstances...
Rich Springall - The essential question is actually how much do you need to make and how 'driven' you need to be. Its all down to your personal circumstances and what you are trying to achieve financially. To explain, let me look at two scenarios. In the first lets suppose the person has inherited a house (or a large capital sum) and they wish to continue working in their day job, which is relatively highly paid. They can rely on a relatively small yield and use the capital (or growth) later when they need it. They are not driven, they will be happy with a yield that is similar to a good deposit rate - 2 or 3%.
A second type of investor may work part or full time on their properties. Their gearing is probably higher and they are are (to a degree) dependent on the income. They will be looking to place their investment where it will achieve much higher rates - minimum 6% upwards. This may involve buying in an area in which they do not live and managing the property themselves; two options which increase margin and take time and thus may be unpalatable to the first investor.
So, in answering the question on yield, it depends how driven you are and what your strategy is. The less time and effort you invest, the less you will make; but that could be sufficient for you! It's all about balance.
9. Aim for 8% rental yield
Megan Houchin - I aim for 8% because I have two kids and only work part time so I need to be sure I have a good margin for repairs and unexpected bills as I can't afford to have my rental properties costing me anything. So far I have managed to clear a small profit every year despite buying and renovating one property a year.
10. When converting an existing building...
Dave Smith - I am relatively new to the process, with only one year under my belt. I was fortunate to purchase and convert an ex-residential care home into four flats at a low cost starting point achieving 10%. When looking to extend the portfolio it is difficult to obtain suitable properties at affordable prices. Therefore I am considering accepting 6-7%. I have been advised by letting agents for example Glasgow that 5-7% is norm, and Edinburgh is generally 4-5 %.
Thanks to everyone who sent in their comments.
So what do you think of our winners thoughts? We'd love to get some more opinions in the comments below.
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