Why do I want to buy this Buy to Let?

Good afternoon

I was chatting to a potential landlord  the other day and she was showing me some details of properties that she had selected as suitable for the start of her portfolio that she was intending to build.  They were nice houses!  Unfortunately she had not asked the  first question that any aspiring Landlord must ask-what is my goal in doing this?

To get a good return on my available capital she responded when I put it to her.   A very good answer you may say except that all the properties showed yields of less than 4%. (see last weeks article on how to calculate a simple yield)

Her response was complete surprise when I went on to Rightmove and picked several properties with basic yields of 6 to 7%.  We then went on to talk about types of property and what the yield could be and where the price of the property will eventually be so high and the rent proportionally low that the yield becomes negligible.

Generally speaking the yield on a one bedroom flat is highest and on a 4/5 bedroom house the lowest.  If a one bed flat costs £80,000 and returns £450 per month the yield is 6.75%.   If a 4 bed house returns £1100 per month and costs £300k the return would be 4.4%.  Quite a big difference! You have to know how to do the sums and you have to know what your aim is.   I was talking to another potential landlord just a second ago (its open house here!)   who wants to buy a property in Weymouth  to move into  in a couple of years time  and rent it out in the meantime.  Yield is not so important to them as securing the property they want now and covering the costs until they are ready to move in. 

We were able to steer them towards an area of Weymouth very popular with renters but also quiet and in walking distance of the beautiful Chesil Beach and the  Fleet.

We don’t have all the answers here at Martin and Co but we do have a wealth of local knowledge and we are willing and pleased to talk to anyone about property so please pop in anytime and we will be delighted to talk to you.

All the best      Philip Wakefield

How to calculate a rental yied

23/04/2014

Today I am going to discuss how to calculate your yield when investing in a buy to let property.  The yield, put simply is your profit, which after all is what you are doing this for.  It can be easy to lose sight of this important factor when you get involved in the excitement of a new purchase.

The standard way to calculate a rental yield is simply to take the price of the property and its annual rental return and work out the percentage of the return against the cost.  This is a good rule of thumb to use to compare different properties when you are buying.

For example    Property value  £100,000  rental achieved over 1 year  £6000.00  yield = 6%

 (6000/100,000 x 100)

However,  this is far too simplistic so when you have sourced your ideal property you will need to work out the return as it applies to your personal situation.   Every investor will have a different calculation for the same property based on their individual costs.  I prefer to look at the yield on my investment so, for example, using the same figures as above, but assuming that I put down £25000 as a deposit and borrow £75000, the yield will look something like this:

Rental achieved    £6000

Mortgage* cost on £75000   (£352 per month so £4224 per year) 

Profit on rental achieved is £1776

2310/25000x100= 7.1%

.  

Of course what the above example also shows is that it is more sensible to arrange your borrowing to maximise your return instead of by what cash you have available. Put another way, if you have £50,000 available is it better to put it all into the one property at £100,000 and maintain a £50,000 mortgage or buy two properties each with a £75,000 mortgage?

Using the same figures as above two properties would return £1776x2 = £3552

One property with a £50,000 mortgage would return £6000.00 rent less mortgage** costs of £2700 profit = £3300 some 7% less!  This is called leveraging your capital and is a good way to maximise your returns.

There are other costs involved in all the examples above such as agent fees, maintenance etc. which would have to be factored in in order to get a sensible  answer . These I have ignored for the time being  but will  cover in a future article.

I am always available to discuss any potential purchase with anybody who is interested so if you are thinking of investing in the market in Weymouth, Dorchester and the surrounding areas drop in for a chat and we can crunch some numbers together.   Our offices are at the top of St Thomas Street in Weymouth.

By the way (small plug here) Martin and Co, Weymouth has an excellent mortgage service available, a no fees whole of market broker. Somewhat a rarity these days!  If you would like details please call 01305 775504 or email

Philip.wakefield@martinco.com  

  

*mortgage costs calculated using a TMW 2.89% Tracker currently available on interest only costing £352 per month

**mortgage calculated using TMW BTL Tracker product at 2.49% currently available costing £225 per month interest only

               

Weymouth property market - Good Capital Growth?

In last week's article, I promised that I would look at the Weymouth property market and compare its rental yield and capital growth for the buy to let investor.   For those new to the buy to let investment game, the yield is the yearly rent from a property reflected as a percentage of the value of the property (one might consider it in the same light as the interest rate from your savings account) whilst the 'Capital growth' is the amount the property goes up in value each year reflected as a percentage of the value of the property.

The average value of a property before the crash of 2007 in Weymouth was around £217,000. The year after, in the 2008/9 slump, average prices dropped in the town to £191000. Considering values today in Weymouth are around £213,000, if you bought in 2009, values would have increased by just over 13.6% which is an excellent increase.  If you had bought in 2007 however you would be a little out of pocket and possibly only now beginning to move into profit.

So, as I have said before,  property investment cannot be judged over short time frames and most certainly not by averages. Often, when looking at a market for a landlord, I like to take a longer look at the market, and consider 10 to 15 years a more suitable time frame for capital growth. I have done some research: a nice terraced cottage sold in Southill in 1997 for £43,000.   It sold again in June 2012 for £147,000. Now the average property value increase for the surrounding area  in that time frame was 200% whilst that property saw capital growth of nearer 241%.   That same property is now valued at £163,000 and would probably achieve near that showing another 11% growth for the lucky owner (who happens to be one of our Landlords).   Average growth in that area over the period of time was 200% so this particular property increased in value by 40%  more than the average.

Nationally, only half the number of properties are changing hands yearly at the moment compared to 2006/2007 so we still have some way to go but the signs are encouraging.  None of this is to say everything in Weymouth turns to gold. There are good properties, which have dropped in value and others like the above that have done better.

As we sell  as well as manage property, I can always give my landlords (and landlords who aren't with me but want a second opinion and even people who are thinking of becoming landlords), my unbiased opinion on what to buy and not buy.   I pride myself by knowing the market intimately, so I can give some great advice and opinion. It might not be what you want to hear but, I can assure you, it will be sound advice. If you want to chat about property investment in the area, be it Weymouth, Dorchester or any surrounding village, with a view to buying right and building yourself some capital growth for the future please feel free to pop in. My offices on are St Thomas Street in Weymouth and I look forward to seeing you soon.

Next week we will look at rental yields/returns on different types of property to be found on the market in Weymouth.

Philip Wakefield – Martin and Co, Weymouth

http://www.martinco.com/lettings-agents/weymouth

philip.wakefield@martinco.com

Buy to let  - Weymouth - a  good place to buy?

I have recently been speaking with a number of landlords about the importance of a balanced portfolio, when buying and renting out property. The balance between buying properties that offer good monthly returns (high yields) but quite often offer poor capital growth (ie they don't increase in value that much over the years compared with the average) verses properties that do go up in value quicker but often offer a lower yield. Another consideration has to be the mix of town properties verses the villages.

Choosing the right village though is very important. Living in villages often has higher costs, especially transport and petrol costs. Some tenants don't buy because they can't afford the mortgage, so if you buy in the wrong village, you could limit yourself to the type of tenant who can afford those extra transport  costs.

However, one town that  has a high demand with tenants is Weymouth. Located centrally on the South Dorset coast Weymouth has for over two  hundred years prided itself as being one of the UK’s premier holiday resorts.   The town, together with Portland consists of some 30600  dwellings of different housing types and a population of nearly 65000 people.

Rental prices range at the lower end from around £650 per month for a two bedroom estate house, although we recently let a lovely 1 bed  annexe in an outlying village, which literally went in hours at £600 per month. From £750 to £850 , a larger 3 bed semi can be rented whilst a £1000+ per month will get you a large 4 bed detached house. One bedroom flats go for £450/500 whilst a nice two bed overlooking the harbour will fetch £725.00 With such a  good housing stock  there is a constant high demand for property in all varieties and  the number of potential tenants constantly outstrips supply. 

So, does that mean you should buy a property in Weymouth  as a buy to let investment? Before I can answer that, you must really consider the capital growth vs yield question. Some buy to let investors often make the mistake of chasing yield over capital growth. Some investors believe that by chasing high yielding properties, in say the poorer parts of Portland, they will make a faster profit than waiting for capital growth. The problem with this is that to achieve high yield you usually have to compromise on capital growth.

Therefore it would seem the most logical solution is to find a high yielding property in a strong capital growth area but, these simply don't exist and  in actual fact, most of the time, lower yielding properties have a better capital growth.  This is because there is generally a contrary relationship between yield and capital growth so the higher the yield, the lower the capital growth and the higher the capital growth, the lower the yield. Property investment in Weymouth and Portland is about balancing the two.

Not many landlords, especially those who use buy to let mortgages, can afford to service high levels of debt without a reasonable yield , which forces them to look at ways of making an investment affordable by finding the right balance between capital gain and yield.

Yield is critical to the survival of an buy to investment but it’s not the key to building wealth. Don’t chase yield for yield’s sake, but rather chase capital growth with enough yield to make it serviceable because in  the long term it is the capital growth, not the yield that will generate  you the wealth and the financial independence you are seeking.

Next week, I will show that Weymouth could just offer that right balance of yield and capital growth.

Philip Wakefield - Martin and Co Weymouth