PROPERTY INVESTMENT FUNDAMENTALS
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The one good thing about the current challenging housing market is that it forces property investors to re-focus on the key fundamentals of property investment. After years of relying on the relentless upward momentum of property values where investors could literally have bought any random property; a wreck, a beach hut, even a toilet block and made money. Some property investors have become lax and lost sight of the property investment fundamentals.
Where do professional landlords go to get their buy-to-let insurance?
The importance of the yield
One of the key investment fundamentals that a property investor needs to be aware of is the gross rental yield.
The gross yield is a measure of the relationship between an investment properties income generating capacity; the rent it produces and its’ capital value. Why is this important? The importance of the yield to an investor, particular in the current climate where financing costs for landlords are rising because of the ‘credit crunch’ is that it is a measure of the investment’s ability to self finance. In making any investment a landlord needs to ensure that the income from their residential investment property will cover its’ outgoings. For most landlords the largest part of the ongoing costs of an investment will be the monthly finance costs. A property investor should ensure that their property investment does not generate a negative cashflow. This way any property investment will be self sustaining.
Landlords should therefore look to measure the attractiveness of a potential property investment by measuring the properties yield. A yield effectively is the measure of the ratio of the rent or income generated by a residential investment property and its’ capital value. For example, a investment property valued at £200,000 which produces an annual rent of £10,000 would have a gross rental yield of 5%.
Gross & net yields
Landlords should be aware that there are two measures of yield on investment properties. The first is referred to as the gross yield. Many novice investors do not appreciate that when evaluating a potential investment opportunity, that there are a number of costs associated with holding a residential investment. These costs should be subtracted from the gross rent to give a net rental yield. Typical costs would be any letting agent management fees, ground rent or service charges. The former can easily equate to 15% of the gross rent with service charges particularly on high spec luxury apartments which have added amenities such as lifts, concierge, gyms, etc accounting for a further 10-15% of the rent. Other costs that need to be taken account of are insurance, service charges for boilers and other regular revenue costs excluding finance charges.
All these charges can result in a net yield of 20-30% below the gross yield. The net yield is the real measure of an investment properties ability to service it’s on going debt charges, because it reflects the free cashflow the residential investment is likely to generate. By using the net yield a landlord will obtain an immediate impression on whether the residential investment is self sustaining. If the net yield is below the finance rate then the investment will be self financing. Depending on the level of deposit used, a net yield slightly below the finance rate may still produce an investment that is cashflow neutral.
The other important use of the yield is that it allows landlords to compare the relative attractiveness of property investments. This could be investments within their existing investment portfolio or between potential investment opportunities. This is important when trying to evaluate which investments to buy or sell and an investment property is good value or not.
Downward shifting yields
Over the last 10 years there has been a shift downward in yields, which has largely reflected the rising value of property. Although rents have also been rising they have not risen as quickly as capital values resulting in the downward slope of the yield curve. This downward trend is now likely to start reversing. Rents are rising strongly and with capital values starting to fall for the first time in over a decade yields once more are on the rise.
High yield investments
Some of the highest yielding property investments are produced by HMOs or Houses in Multiple Occupation investment. These properties where rooms are rented out separately are the most intensive type of property investment for a landlord but can still generate gross yields in double figures. Rental yields are often highest in the north and Scotland where capital values are lower although this will vary very much on specific areas.
Property Hawk investment challenge (high yield property FOR SALE)
Property Hawk is always looking to help find the best investment opportunities for its growing communities of landlords & property investors. Therefore, Property Hawk is challenging its users to find the highest yielding investment properties FOR SALE. This could be an investment property that a landlord is looking to SELL, or even one that they have found that they think would make a good investment for one of the other members of Property Hawk’s property investing community. Genuine high yield properties will have their details featured for FREE in the newsletter e-mailed each week to our growing community of 15,000 property investors. All you need to do as a Property Hawk member is provide us with the following details:
- Location of the investment property i.e. town and postcode
- Description e.g. 2 bed apartment with kitchen, ensuite and living room
- Value of property
- Rental value
- Estimated gross yield
- Link to any sales website on which the property is featured
- Property Hawk e-mail address ( shown within each registered users profile)