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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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Re: Yields from different types of property investment?

#295379

Postby brightncheerful » March 29th, 2020, 1:36 pm

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.


Having been advising landlords and investors (same thing really) in the commercial property market for about 47 years (excluding the first 5 years of my working life when I worked for a multi-disciplined firm of surveyors and wasn't allowed to advise unaided) and having written extensively about successful investment in commercial property (England and Wales only : the law in Scotland differs), I don't profess to know it all but this I do know:

Comparing yields from different types of property investment is a waste of time and pointless. Commercial property is an umbrella description for lots of different sectors and segments, each of which having their own characteristics, With commercial property (if not residential as well) yield (normally gross, unless otherwise states) is normally expressed as gross yield.

The commercial property is not one big market: there are regional variations and location variations The principal adage is location, location, location. Yield is the relationship between the rental income and purchase price. But yield is also another way of expressing years purchase. ie, the number of years before one gets one's capital back. YP is calculated by dividing 100 by the percentage yield. for example, 7% would be 14 yp approximately. When assessing yield without remembering the yp, the fact that anything can happen over the number of years can get overlooked.

Unlike residential property which normally fetches a higher price with vacant possession than if let, commercial property normally fetches more when let. However, buying a commercial property that is already let is a depreciating asset because the purchase price is based upon the security of the rental income at the date of purchase. The security includes the certainty of getting the rental income which is why the tenant's covenant is also important. For example, a lease for 10 years remaining is worth more than a lease with only 3 years remaining but 10 year let to a run-of-the mill local tenant might fetch less than 3 years to a nationally-known covenant For the investment to hold its value, the rate of depreciation requires an equivalent rate of appreciation.

The rate of appreciation depends upon rental growth and when Base Rate is high on the prospects for yield compression, having regard to normal borrowing rates. With Base Rate at 0.1% and yield compression factored in, commercial property investment could be said to be priced to perfection.

Rental growth is a product of supply and demand. However, supply isn't the same as suitability. whether a tenant would pay a higher rent depends.

Unlike residential buy-to-let where tenants generally have to fend for themselves over rent increases etc, tenants of commercial property are often advised by surveyors, such as myself. When I act for a tenant of a commercial property, my job is to prevent the landlord getting what it wants by enabling my tenant client to get what it wants. Vice versa when I act for the landlord. Although the relationship between landlord and tenant of a commercial property should be a partnership, in practice it is predominantly confrontation. The outcome of a rent review and lease renewal can make or break the landlord's investment, so to the tenant's business.

Unlike residential BTL where an Assured Shorthold Tenancy agreement is a standard document that can be tweaked to a limited, there ks no standard form of lease common to all landlords and tenants of commercial property. A lease is drafted from scratch, albeit template exist but the terms and conditions of a lease can be changed depending whatever the parties would agree. There is some overriding legislation but a business tenancy is a commerfcosl contract which means the parties are deemed to know what they are doing.

Objectively, the value of a commercial property investment is the capital value if the passing (current) rent plus the capital vale of the estimated rent at the next rent review or lease renewal deferred by the number of years before that review / renewal.

Although yield compression - and yield expansion as evidenced by lower valuations for quoted prop co NAVs - has introduced another way of thinking into the valuation process, in principle the higher the yield at the outset the lower the prospects for rental and capital growth.

If you buy a commercial property that is vacant ti be begin with with a view to letting it, how long it might take to find a (suitable) tenant depends. I say 'suitable' because it might not pay to accept the first one that comes along. even if you do the. chances nowadays of a tenant wanting to commit for more than about 5 years or without a break clause are slim. Generally, it is restaurant tenants that prefer longer leases because that enables to write down the value of capital expenditure over the term.

Give the permutations that exist, successful investment in commercial property may be summed up in two words: judicious choice. In other words, were and what to buy, when to buy, how to manage and capitalise on the relationship with the tenant, when and how to sell.

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Re: Yields from different types of property investment?

#295395

Postby PinkDalek » March 29th, 2020, 2:02 pm

brightncheerful wrote:Yield is the relationship between the rental income and purchase price.


Maybe you are talking on original acquisition but I look, as far as possible, at current commercial rental income flows (a moveable feast given deferrals) as against current open market value (whatever that might be in this current situation), if you get my drift, although one would depend on the other.

Historical purchase price is of little relevance.

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Re: Yields from different types of property investment?

#295399

Postby brightncheerful » March 29th, 2020, 2:07 pm

I agree but the op is about buying a commercial property for yield, not how to assess yield during period of ownership.

whatever that might be in this current situation


From the numerous recent auctions of commercial property auctions (mostly on-line currently) buyers don't seem to be put off by the current situation.

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Re: Yields from different types of property investment?

#295402

Postby PinkDalek » March 29th, 2020, 2:13 pm

Fair enough, thanks for clarifying, but that sentence confused me in isolation.

In case you haven't spotted it, since way back then, Clariman is now looking at:

Time to buy?
viewtopic.php?f=13&t=22562&p=294854#p294854

Albeit that is regarding holiday let properties, which I know are not specifically your field.


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