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Yields from different types of property investment?

Covering Market, Trends, and Practical (but see LEMON-AID for Building & DIY)
Clariman
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Yields from different types of property investment?

#258418

Postby Clariman » October 17th, 2019, 10:44 am

What kind of yield do you expect to get from the various types of property investments that you hold?

We have a couple of holiday-lets which both started out as holiday homes for us, but we also rented them out to cover the costs. While we still have that objective for the more recently acquired one, the first is now an out and out investment. Looking over the last 2 years its yield (net income before tax/asset value) is between 4.5% and 5.5%. That is significantly better than having the money in a bank account but I have no idea how that compares with others.

A friend invests in commercial property and his minimum is 6% to make it worth his while. I must admit I was interested that commercial properties can come with guaranteed yields, with long-term leases in place. Of course that is not forever, but a solid foundation.

Clariman

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Re: Yields from different types of property investment?

#258661

Postby JonE » October 18th, 2019, 8:46 am

Clariman wrote:yield (net income before tax/asset value)


It may depend on what you are planning to use the 'yield' numbers for (you mention in passing a comparison with money in the bank) - but that may not be the best definition for every purpose. For some purposes I found it useful to consider 'net realisable value': what cash could I trouser for investing elsewhere if I disposed of a specific property and what gross income is it earning for me where it is. Admittedly, this introduced my personal tax position into calculations (along with how I secured borrowings) but that basically just meant I shouldn't compare 'my' results with results derived in any other way. All 'my' calculations were only for a specific point in time.

My FHL activities didn't involve borrowing secured on the properties whereas my BTL activities did - but not all BTL properties acted as security so disposal of one might involve redeeming a mortgage whereas disposal of an identically valued property might involve no redemption so I would trouser much more cash for alternative investments. One complication I had to watch for is that selling unencumbered (or only lightly leveraged) properties could cause total borrowing to exceed historic cost of portfolio and breach that limit on allowable interest.

It was also the case that CGT calculations on the disposal of properties used in the FHL trade were on a different basis from those used in the BTL business and that had an effect on how much cash I'd realise.

I knew only enough about commercial to recognise that I knew nowhere near enough about commercial to get involved in any hands-on way. It struck me as a fundamentally different animal that required paying for involvement of a specialist. Buying a future income stream in this way can look attractive but I'm not sure how 'guaranteed' yields might be if the tenant is, say, a large retail outfit seeking new arrangements with its landlords.

Cheers!

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Re: Yields from different types of property investment?

#258745

Postby modellingman » October 18th, 2019, 12:30 pm

A quick google came across this site https://www.totallymoney.com/buy-to-let-yield-map/ which suggests average rental yields of between 2% and 10%, dependent on location.

That sounds about right but I would be very wary about Totally Money's postcode analysis, where the only positive thing that can be said for it is it has avoided the trap of using the arithmetic mean as the average for selling price and rental income and has instead used the median. Specifically, it is not clear what levels of sample error are caused by mismatches in property type/detailed location/etc between the samples of sales and rents in each area which form the basis of the results.

Whilst between 4.5% and 5.5% is considerably better than returns on savings, there is of course more work and more risk involved in owning properties for rent.

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Re: Yields from different types of property investment?

#258758

Postby monabri » October 18th, 2019, 1:07 pm

A lot depends on where the property is. My Brother in Law let's a house near Bicester...the yield is about 2%...his gains have come from capital appreciation to the extent that he would have a significant CGT bill if he sells.

We have a one bed flat in the West Mids and the gross yield is 4.8%.

However, the star of the show is a mixed commercial lock up with a one bed flat above. The combined gross yield is over 10%. The property was an inheritance in which we have a 50% share. We also had a 50% share of a bill for £10k in the first year for a new roof. :(

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Re: Yields from different types of property investment?

#259248

Postby Charlottesquare » October 21st, 2019, 12:02 pm

We these days only do commercial but used to also have 61 flats in two blocks. Given we needed to pay for management of the portfolios (outside professional input re both leasing and day to day tenant/property management and in house staff in the business ( as out rental income was circa £1.4m p.a with about 150 tenants this was not a DIY portfolio) we may not be typical so the undernoted are roughs before management costs.

Residential circa 4.25% gross, after repairs/insurance/EPCs/Gas saferies etc nearer 3%, commercial (tertiary/secondary) circa 10%-8% gross and then depends if a good or bad year re repairs as most were IRI not FRI. (though these days we also do inclusive rents where yields are much higher but we cover utilities//insurance/everything, even toilet rolls- tend to be 12 month licences to occupy rather than longer leases)

The downside re commercial will be the length of voids between tenancies will likely be far higher than with decently located residential, we had a residential void rate some years at less than 1%, commercial property whilst we are good at containing voids can be a fair bit higher- whilst currently I have about a 1% void since 4th October this year (prior to that 100% occupancy) post 2008 I was up at nearly 10% void for over a year as we lost two larger tenants in bigger offices and could not find replacements, we ended up downsizing (splitting) the offices; small is good in the tertiary market but does need far more management.

Long leases are becoming thinner on the ground within the tertiary market, it now feels, ignoring pubs and some retail, that a five year lease with a break clause at three is now a long lease, large numbers of ours run on annual renewal basis (well often up here in Scotland tacit relocation)

I prefer managing commercial but do appreciate that maybe that is because I am comfortable with bespoke legal documents etc, they also tend to be more price volatile in a recession than residential as the lending market for commercial is much narrower- 2008 onwards was very difficult and if a geared play issues sorting banking renewals in a poor market ought not to be ignored when deciding if the correct medium.

Personally I prefer shares/investment trusts with say 4-5% yield, I have never been convinced rents were high enough to compensate for the lack of liquidity/management hassles, but do appreciate that as a class property has likely outgunned shares since say 1995.

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Re: Yields from different types of property investment?

#283266

Postby Jimarilo » February 9th, 2020, 1:15 pm

I came across this website yesterday and was gob smacked at the weekly rates of these holiday lets where we live. Some have that are not fully booked are new to the market just a matter of months ago after being purchased and had a refurbishment

http://www.dornochtownandcountryletting ... erties.php

The attraction is the Royal Dornoch Golf course and courses in the surrounding area, including Skibo. There has been substantial investment come into the village, with planning in place for a further course in Embo next door

I bought a property in the village 2016 and have redeveloped to substantial 4/5 bedrooms (two super sized) property. Kitchen diner is 40m squared, with two bathrooms and an en suite. All on 1 acre

The property lend it's self to be a holiday let very well and has a substantial amount of parking and a large garage

Looking at the for sale market this property would be in the region of £400k on the face of things, however with a view to a holiday let based on £400k and rental rates, yields could be between 20 and 30%, which leads me to think the valuation of the property is too low. What is the yield percentage expected for holiday lets

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Re: Yields from different types of property investment?

#283387

Postby formoverfunction » February 10th, 2020, 9:20 am

My portfolio

B2L 13%
REITS 6-8%
Debt of Commercial Property c6-7%
P2P 4-5%

As ever timing of the purchase makes a difference.

My preference ot the moment is property debt over owning the B&M (bricks and mortar).

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Re: Yields from different types of property investment?

#283399

Postby Charlottesquare » February 10th, 2020, 10:51 am

Jimarilo wrote:I came across this website yesterday and was gob smacked at the weekly rates of these holiday lets where we live. Some have that are not fully booked are new to the market just a matter of months ago after being purchased and had a refurbishment

http://www.dornochtownandcountryletting ... erties.php

The attraction is the Royal Dornoch Golf course and courses in the surrounding area, including Skibo. There has been substantial investment come into the village, with planning in place for a further course in Embo next door

I bought a property in the village 2016 and have redeveloped to substantial 4/5 bedrooms (two super sized) property. Kitchen diner is 40m squared, with two bathrooms and an en suite. All on 1 acre

The property lend it's self to be a holiday let very well and has a substantial amount of parking and a large garage

Looking at the for sale market this property would be in the region of £400k on the face of things, however with a view to a holiday let based on £400k and rental rates, yields could be between 20 and 30%, which leads me to think the valuation of the property is too low. What is the yield percentage expected for holiday lets


FHL you do need to consider occupancy percentages in the bleak months and costs re linen/cleaning/changeovers/marketing etc, from experience you will get a better return than a straight letting (if in decent location) but you will also work harder. Also look at Rates payable versus Council Tax (with small business rates relief this may benefit you) and do consider future required fire etc systems- imho the entire AirBnB market is one bad fire away from a vast slew of legislation being applied to it by politicians. It also, down here in Edinburgh, has a lot of politics tied up in it re housing availability for normal rental so my advice is embrace it providing you always have a Plan B re the property if the legislative environment changes.

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Re: Yields from different types of property investment?

#283483

Postby Jimarilo » February 10th, 2020, 5:49 pm

Hi thanks for your reply.

Having worked for property management companies in Surrey and Berkshire, I know how expensive it can be maintaining high end properties for high end tenants. Weekly holiday lets would be even more work intensive, whether it be the letting agent or myself managing the property. Either way lettings is not for me.

I was more trying to value the property for re-sale, based on the potential annual income in the holiday letting market So annual income divided by the property value x 100 = Yield ? What typical ball park yield would a potential buyer be looking for ?

Cheers


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