A while back a mate of mine who is lucky enough to have a few properties told me he didn’t buy a property unless he could see a 10% yield. Given that rents in this area (Watford) are about £500 a month that would mean that the price of a 2-bed property would have to be £120,000 to yield £12,000 of rent.
But it’s not.
A quick scan of rightmove shows that the average price of a mid-terrace two-bed house in leafy Croxley Green near the tube will set you back around £275,000. And if the rent you get is really only £12,000 a year then that’s a little over a 4% yield.
But it doesn’t stop there – to buy it you pay 3% stamp duty, you’ll need a buy-to-let mortgage at around 5%, you’ll pay an agent 12% to manage it, you’ll need to furnish it and insure it too. You also need to assume you won’t rent it every month of the year either so allow for some fallow months with no rental. Finally, Council Tax for that band will be £1,400 making total year one expenses around £23,000. Income: £11000 on which you pay income tax at, say, 40% so call that £6,600. You’ve just lost about £16,000 and the property value will probably drop 2% so that’s another £6,000.
Year two onwards will show a small annual profit of about £500 unless you have a burst water tank or a major disaster but at that rate it will take you about 12 years to move into profit and there’s no guarantee the capital value will appreciate either during that time or that interest rates will stay at the record lows of late.
If you tie your £275k up in a trust you might get 3% or £8,250. And if you take advantage of some of the deals out there you might get more for some of it so it’s not unreasonable to expect the purchase price to yield about £10,000 if cleverly invested – not far off what you might have got in rental without the expenses or the hassle.
Or you could spend it all on a really good dinner and lots of alcohol like my head is telling me I did last night and explode in a schnapps supernova.