Fair to work out property yield based on multiple sources?

[Sacred]

Hi

I've been thinking about getting another flat in the building I'm in, primarily because they make pretty good investments. I'm not planning on living in it (yet), I simply want to own one, for later and for their resale value at a later date.
Apartments in my block have gone up like silliness in my block even with this 'impending recession'.
I bought my current 1 bed flat in it for £220k, and now its worth about £290k.
This happened in about 18 months, granted its not the biggest jump a price can make, however, the building is 300m fromthe olympic ground and I know closer to the time they will be worth a lot more.

Just a little background, I have on house which I re-mortgaged to get this flat, I currently let the house out on a 'guaranteed rent' scheme

Now. Onto my question.

If I wanted to buy another 2 bedroom flat, for £375k, and let it out AS WELL AS my curent flat. Making it 3 properties that I have rented.
How do I calculate yield? Is it fair to combine each source?

I've worked out based on how I was told to calculate property yeilds that with all 3 rents combined against the capital invested from the bank to have a yield of around abou the 8.5% mark after all deductions.
Based on dividing the total invested capital by rent in each year (x100)

Is this the correct way to do it with rental property or should I be calculating yield solely with mortgage payments/rent?

I will be living with my gran for a while (a year or so) so that I can concentrate on Uni work and also look after her, but also save some money.
And I'll be working weekends and using a student loan to support myself.
Before I do buy one I will save roughly about £3k and will have sold my car (£6k) so will have a little backup capital should I have trouble paying my mortgage during some months.
OK I will be paying more than half the income frm the rent in mortgage fees, but this is based on me having 2 investments in the same building and being able to sell them off when I need to, or live in them should I choose to

Any thoughts would be great.

-greg

 

[Sacred]

I've been hearing and reading this everywhere, how does this affect the housing market?
Would you not say its a good time to nab a bargain, mortgage and property-wise?

 

[Sacred]

Whilst its not quite as dramatic as he paints it, now is not the best time to buy for let.

Technically I won't have bought anything until around november.
I have to save a little and start clearing out my flat first. I'm moving out regardless, as I can be more focused at my grans.

 

[Sacred]

it totally depends where you are buying, the rental market at the moment is top notice, hasnt been this good for a while, but again depends where to.

Bow, The Bow Quarter to be exact. Heavily sought after flats near the olympic village.
Theres nowhere else in east london that you could sell a 2 bed flat (albeit on the penthouse level) for £460,000. Well I havent been able to find one anyway.

 

[Sacred]

To answer the OP question:

You can calculate the yield in different ways depending on what you consider to be your net income.

Think of it like this:

Rent (gross income)
-Operating Costs
-Taxes
-Any other costs
= Net Income

Now it depends what kind of yield you're trying to calculate because there's Income yield and there's debt yield.

Either yield should deduct costs and should therefore be based on Net Income.

Debt Yield: Net Income/Debt
Rental Yield: Net Income/Purchase Price + Costs

In residential property investment it would be suffice to say that you can work it out like this:


Net Income (all properties) / Purchase Price + costs (all properties)

Same with Debt Yield. You can also apply this to your interest cover but make sure you take each interest rate you're paying into account or use a blended rate.

Sorry for the lack of response, but this thread seems to have taken on a whole new life since I last posted (!)
Thanks for the info.
Based on this I work out a yield of ~9%.

I'lll put it like this.
I can't pay the mortgage of the £375k flat with its rent alone. Rent simply isn't enough to do so.
But when I combine all the rental income to pay fo the total mortgage amount I will still have around about £1200 after each months deductions (service charge, etc).

As I said originally, I plan on living independantly of this income for a year or so, which is the reason for me thinking about it.
All tenancies will be locked into a guaranteed rent scheme also. To avoid any unpleasantries. I don't have a problem losing money to an agent as long as I have peace of mind, the remaining figure above also includes the letting agents fees.
In the mean time, as I mentioned, I plan to save so that the void period, between the exchange of contract and beginning of tenancy will be covered in terms of mortgage payments.

I know mad rapper and a few others are 100% against the idea, but as I say its not set in stone, I haven't bought anything yet. I'm going away to save a little and will be watching the prices very closely in the mean time.
Its my money and my future at the end of the day, I wouldn't take sucha big step without calculating the risks.

 

[Sacred]

because of this ridiculous culture where people believe that the easy was to get rich and make money is to borrow huge amounts of money and get a BTL - what could possibly go wrong??? Once the credit crunch starts warming up and lenders have no choice but to raise interest rates all these people are going to be repossessed. Just wait and see.....

My point exactly, is that I wouldn't fall into this category.
I wouldn't work something like this if all the combined (net) income only JUST paid off the total monthly mortgage payments. I always calculate based on there being a buffer.
I plan on getting a fixed-rate mortgage when my mortgage is up in August and AFAIK I WILL be safe for 2 years.
I have to transfer my mortgage regardless, which is the reason for this whole thread as I was thinking of my options.

 

[Sacred]

very wise.

and a return of 9% is very good effort lol.

the only reservation i would have on this one is that it is a flat, and there are lots of them now, lol. but as a long term investment i still think you have hit it on the nose.

whatever you end up doing, good luck

Thanks mate

Just a little background too.
I'm not looking to this as a buy one year sell the next kind of get rich quick scheme. I want to let both properties generate some rent to mantain themselves while gathering value, maybe live in either of them when I am in proper employment and done with Uni, and sell them on at some point.
This will be either when I see that they have made a good amount of money on top of what I paid for them.
Or I simply want to move onto something else and free up the capital.

I'm really not one of those people that looks at things as how much money I can make within a given time. I KNOW I will make money from these flats, and I can be patient enough to wait out such a profit.
My reason for the post is simply to get some feedback on my plan to set the flats up to maintain themselves.

 

[Sacred]

Haven't read the whole thread in detail but just on this point, whilst doing this in theory may be OK trying to get a mortgage based on this may be another matter.

Usually mortgage companies will want rent to be at least 100% of yearly interest payments, usually more, in it's own right not based on the rent from the mortgaged property plus other properties that they are more than likely to have no charge over whatsoever.

Yes, But I'm not getting a BTL. I'd be getting an extention on my existing remortgage on my house, i.e just taking more money out.
I don't think they will have a problem with this, but I will be going to the broker soon just to see if it IS an option, no point making plans if I can't do it in the first place.
They'll want to know that I can pay the interest payments (getting it interest-only) back each month. And when I show them the figures I don't think there will bea problem.

 

[Sacred]

Yield has nothing to do with any mortgage - it is merely the purchase price and the rent.

There is some merit in combining the properties together, you will need to do so for Income Tax purposes. But I would still want to know how each property is performing.

Have you allowed for void periods?

An anticipated Gross Yield of ~ 8.5% p.a. is the minimum I would be looking for - capital appreciation is unlikely for several years in the current economic climate.

What is your estimated Net Yield?

That is net yeild. And Yes, if you read my previous post I will be saving money to deal with void periods. Otherwise I would be losing money in that instance.