Author Topic: Aim for capital growth or yield  (Read 2463 times)

frugledoc

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Aim for capital growth or yield
« on: February 17, 2014, 12:13:48 PM »
I'm going to view a flat which I am thinking about buying as  rental investment.

It is a 1 bedroom flat done up to a good standard but in a poor part of the town I live in.

The flat will cost 25 - 29000 to buy and would rent for 275 - 350/month.    So around 10% rental yield

Unlikely to appreciate much due to its location.

Alternatively, there is a property I really like in the good part of town which is 135.000 for a 1 bedroom but I would need a mortgage for 95.000 and rental yield would be 4 - 5%.  This property is desirable and will probably increase in value over the long term.  Also, tenants are likely to be easier to deal with!

So low quality, no leverage, high yield vs high quality, medium leverage. lowish yield.

daverobev

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Re: Aim for capital growth or yield
« Reply #1 on: February 17, 2014, 01:17:47 PM »
Where are you?

If USA, *start* with two rules of thumb - 50/2. 50% of your gross will go to tax, insurance, maintenance, etc. Aim for 2% of purchase price as gross per month.

If UK it's different as you're not paying the property tax, and insurance is cheaper.

If elsewhere, more info needed.

For the mortgaged one you need to work out CoC - how much left over after all expenses against what *you* put in.

frugledoc

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Re: Aim for capital growth or yield
« Reply #2 on: February 17, 2014, 01:35:56 PM »
In UK.

Property taxes are paid by the tenant here. 

Also, 10% of rental income can be deducted from total rent each year for wear and tear.

2% of purchase price is not possible anywhere in the UK for rental investments. 

honobob

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Re: Aim for capital growth or yield
« Reply #3 on: February 17, 2014, 03:10:46 PM »
I'm going to view a flat which I am thinking about buying as  rental investment.

It is a 1 bedroom flat done up to a good standard but in a poor part of the town I live in.

The flat will cost 25 - 29000 to buy and would rent for 275 - 350/month.    So around 10% rental yield

Unlikely to appreciate much due to its location.

Alternatively, there is a property I really like in the good part of town which is 135.000 for a 1 bedroom but I would need a mortgage for 95.000 and rental yield would be 4 - 5%.  This property is desirable and will probably increase in value over the long term.  Also, tenants are likely to be easier to deal with!

So low quality, no leverage, high yield vs high quality, medium leverage. lowish yield.

Why not aim for both?  Generally from my experience over 35+ years a non cash flowing property in a high appreciating area has strong rent growth so after a few years of 6%+ increases you have BOTH cash flow and appreciation that blows the doors off a property that initially cashed flowed. 

daverobev

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Re: Aim for capital growth or yield
« Reply #4 on: February 17, 2014, 05:00:54 PM »
Ok, I have a rental in the UK. 25-29k is hella cheap! If you can get 275+ that's a good plan. Agreed, 2% is very unlikely in the UK, but it's a different game.

Cashflow properties = less risk in unforseen situations. If it's cashflowing and you lose your job, no big deal. If it doesn't pay for itself month by month, and you lose your job, can you afford to cover the extra costs?

Cheaper places will appreciate at the same rate as higher, IMO. But of course they key is leverage. I'm not a huge fan of it... mortgage for 95k, at what rate? 6-7+%? That'll take a big chunk... especially if rates go up (which they will) - not sure how long you'd be planning on taking to pay off the mortgage.

Also, I haven't claimed any depreciation on my house in the UK - not sure if it's the same actually, but in Canada you'll pay that back when you sell. So it's not "free money" here. It wouldn't help me in any case as I don't have other income in the UK now anyway. Worth checking.

If you can get 550-600 a month on the 135k place vs 275 on the 25k I reckon you'd be mad to. Are there extra fees for the flat - I guess it's leasehold, so there is that.. but what about extra maintenance?

If it's a shithole type place and you're only going to rent to people on the dole.. yeah I'd skip it. But, for the UK, 1% is a really good return. If it is NOT going to turn your life into a living hell, go for it.

frugledoc

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Re: Aim for capital growth or yield
« Reply #5 on: February 18, 2014, 12:21:19 PM »
Thanks for the advice.

I'm going to cancel the viewing on the cheap, high yield property.  I don't think I'm ready to deal with council tenants and the associated hassle.