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Net Yields for a newbie


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Hi All,

 

This my first post on the forum. I was wondering if anyone can give me some advice on target net yields for rental properties. Is there a range or scale I should be aiming for? I am wondering if a yield of say 10% is achievable on a mortgaged property, which would be comparible to a stock market index linked fund or similar investment. Thanks Josh

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10% in your stock market index fund? Can you manage my finances please?!

 

I think the real return of equities (adjusted for inflation) since 1900 is about 5.2% and only 1.3% for property. 

 

To be fair, the 5.2% represents dividends reinvested, so if you reinvest your rental income I'm sure the 1.3% would increase too.... but noone has worked that out yet. 

 

My history lesson point being, 10% in equities is probably not that achievable long term, so it's not a good thing to bench mark against. 

 

 

Having said that, cash and bonds are a good measure. Bonds are yielding around 4-6% depending on their quality, and are fairly low risk and zero maintenance. Cash obviously around 2% and likely to, at best, keep up with inflation. 

 

Personally i think bonds and property have a similar risk profile. Affected by different things, but macro economics affects them. At least with property you have a degree of control to increase the value (sometimes anyway) so you can do your bit to increase value. 

 

So I think NET should be a minimum of the higher of bond yields, that being 6%. 

 

 

There will be some who say you should account for capital appreciation in property. True, it does have a tendency to keep happening, but it's guess work. People don't buy bonds generally on the belief that the underlying price will change dramatically, they buy it for the yield. Think that's the difference between a property investor and a property speculator. 

 

But if you are going to account for that, use the local area average at least and ideally over 20+ years if possible. 

 

 

Personally, and it's hard to say why I keep on typing all this when a simple number probably would have sufficed, but my minimum NET ROI is 10%. If you're new, then I'd accept lower, maybe 6-8%. If it's in a particularly strong area, I'd probably accept a squeeze on the yield for the gamble that the prices will appreciate. But I recognise it as a gamble, and 80%+ of my portfolio is purely yield driven. 

 

Hope that thesis helps. :-) 

Damien Fogg
MRICS CeMAP CeFA

Email: damien@theepinvestor.com

Web: www.theEPinvestor.com

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Hi Josh,

 

I met a developer last week who told me that he pays 10% interest on any money he borrows for his development projects. The term could be just for the duration of each development or as an ongoing loan.

 

In Bournemouth one can achieve a 6% return on vanilla BTL or around 10% for an HMO.

 

At present you can borrow at around 3% for a BTL so that you are also obtaining a return of 3% from all the money you borrow (as you are getting 6% from your let) less maintenance costs.

 

If property prices increase by 4% over the 5 years fix term and you are leveraging by 4 to 1 then you are making a capital gain of 16% per year from your deposit plus a healthy positive cash flow percentage.

 

Because property is a relatively safe tangible asset banks will allow you to leverage your deposit unlike stocks and shares.   

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  • 1 month later...

Thanks for the replies gents.

 

Damien - I was incorrectly comparing property 'yield' to share price 'capital growth'...I should have been comparing property 'yield' with share 'yield'! In which case if I buy below market value a 10% yield would beat even the best stocks & shares income. (A decent high yield income share such as Unilever is 3% per year)

 

Damien / Noel - With regards to capital growth you rightly point out that the uniqueness of property is that 'Magic' leverage.

In layman terms for me - I can only buy £100's worth of shares with a £100 investment, whereas I can buy £400 of property with a £100 investment.

Admittedly it is possible to get very good share price growth, but it can just as easily go the other way. I am currently investing medium term on the stock market to build up a deposit fund that I can then leverage on a property. 

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  • 4 weeks later...

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