What is a good rental yield when looking at rental property?
Often property is advertised or sold to investors as
“high yield property”
Is this the only metric to consider when buying an investment property?
Here’s what I have found over the years…
There’s a big problem in the Buy To Let property sourcing market
A lot of properties that are sold to investors aren’t what they appear and can catch investors out leaving them with a property that doesn’t…
“do what it says on the tin”
Let me explain…
When you’re looking at buying investment property there are several different factors to consider before you…
“pull the trigger”
And actually start investing with your hard earned cash.
Property investing in general is a long term play. So it pays to take the time to get it right at the beginning and invest in the right property,
Otherwise you could be left regretting it for a long while!
I understand why investors focus on rental yield and new investors ask “what is a good rental yield” this question comes up at nearly every networking meeting I go to…
I remember the early days of my investing, I was dead keen to get more and more property under my control.
I didn’t really pay much attention to which properties where the ones I should be buying and which where the ones I should “avoid”, I too was focussed on rental yield.
Now after several years have passed under the bridge I’ve learn’t to be a bit more choosy,
I’ve also learn’t that how the property is advertised with headline yield or ROI is not necessarily the whole picture,
Quite often you have to dig a little deeper.
Often with investment properties yield is given as the metric for an investor to use to weigh up that particular property,
I’ve learn’t that not all yields are equal,
and further more yield isn’t really a great metric either. It doesn’t take other factors into account such as…
- The likely hood for that property to be empty for a certain amount of time
- The likely-hood that it will be trashed by bad tenants.
If you get the area wrong the chances of these things happening increase!
But on the face of it yield doesn’t give that impression.
Let’s dig a little deeper…
Lets assume we are looking at 2 properties, one with a 10% yield
One with a 7% yield
Clearly one stands out using these numbers as being “a better deal”
The problem is that there are so many other factors that go into creating a great investment property, that yield becomes sort of irrelevant.
A largely forgotten but massively important point to consider is…
How long will the house remain tenanted over the course of a year?
Yield assumes 100% occupancy and no investment property gets 100% occupancy over the longer term.
This is my issue with a lot of the properties sold to investors in the buy to let market.
On the face of it the numbers look good but a high proportion of these properties with…
Are in areas that are going to cause the investor a lot of problems.
From experience you will get a higher percentage of:
- Bad paying tenants
- Tenants that trash your properties
- Tenants with un-desirable friends moving in.
This then has a knock on affect of putting off good tenants and can even give a property a bad name locally
Putting off more tenants!
If you factor in the higher % chance of tenants not paying. Then having to spend £2k – £5k on a property when you eventually get them out:
That 10% yield doesn’t look so good
Now don’t get me wrong, you can have problem tenants in a good area
But in my experience you get less of these!
Which is why I’m a believer in owning better properties in slightly better areas
That “on paper” may not look so good but…
Over the long term will keep plodding along giving you a good return year after year.
The other thing that is worth mentioning is properties in worse areas with
“higher paper yields”
Also tend to have less capital appreciation, I looked at some last year in an northern east coast town
The property values hadn’t recovered from the 2008 crash
This was in 2017 nearly 10 years later!
Sure they gave a great “paper yield” but it was a very depressed area
The chances of getting a “bad tenant” are significantly higher.
As mentioned before you can get a good tenant in a bad area and you can also get a bad tenant in a good area,
But probability wise your chances of getting a “wrong un” increase in the bad area and decrease in the good area.
I’m not sure on the actual percentages here but for illustration purposes…
Lets suggest in a bad area you may have an 80% chance of a “bad tenant” 20% chance of a good one.
In the good area you may have an 80% of a good tenant and a 20% chance of a bad one
(it will be much less with proper referencing checks as well)
So to summarise “what is a good rental yield” there are other factors to consider in order to make a great decision.
When buying an investment property don’t buy on face value alone,
Quite often a better property in a slightly better area with a lower gross yield will be a better investment over the long term.
Give you a better net yield (the amount you get to keep) which is what we are all after!