WORTH THE INVESTMENT? IT

Eh, Im not much good at maths, but is this yeild calculation correct?

in simple sums it is 4 percent. 14400 return from 360000 is 4 percent.

In reality an investor wouldn’t pay 360000 as they would have to pay Stamp duty and legal fees.

Also in reality they wouldn’t receive 14400 a year as they would have managment fees, empty periods and maintenance costs.

Also how do we know will it rent for 1200 amonth , EA have been known to exagerate the amount of rent a place could demand.

So they might pay 385000 for the place and might get between 10,000 and 12,000 a year which would be . between 2.6 and 3 percent yield . This would of course be paid for borrowed money at 5.5 percent

More or less - 4% gross yield on the purchase price, ignoring Stamp Duty, which is at current rates somewhat less than the suggested 90% IO mortgage on the place.

You’d need 4.4% yield to break even on the mortgage, and that’s ignoring the fact you put both the SD and 10% deposit into the place - once you add those, voids, maintanence etc in, things don’t look particularly good.

heres how you work it out.
take the monthly rental and convert it to yearly rental.
in this case is 1,200 a month = 14400 a year.
ie 1200 x 12 ( months ).
to get yield , you take the price of the gaff ie 360k , divide it INTO the ( yearly rent * 100 ).

so thats
1,440,000/360,000 = 4.
so yes thats 4%.
this is the gross yield.

now bears on here would tell you you shouldnt take the yearly rent to be equal to 12 months ( should be 11 ).
then before you do your final calculations you should also take into account furnishings etc.
these are all subjective and open to interputation - people will bend these figures to suit their arguement.

but the figures they quote are correct and the yield is 4%.
still ridiculously low , and IMO not worth the hassle.

I dont understand the significance of yield then. In and of itself it means almost nothing? Yield has to beat interest payments, (and the asset has to increase in value in the case of an IO mortgage) for it to make money right?

Using the very generous rates etc supplied with the article and going interest only, the landlord would still be losing 120 per month. So is yield only of significance as a function of rental value over purchase value, completely oblivious to the cost of credit?

I thought the same, as I’ve seen agents exaggerate rents in this kind of article before. But in this case it seems to be an accurate asking amount judging by very similar houses on Daft.

Morell Drive, Naas - 1300pm
www.daft.ie/239461

Morell Drive, Naas - 1200pm
www.daft.ie/234955

Whether they will actually consistently achieve this amount in the future is another matter.

well yes its just a figure - the higher the figure the more likely it is to make sense as an investment. its a good starting point i suppose.

i would say yes , the absolute minimum return should be beating interest repayments. if you are subsidising the interest repayments then you are in effect banking on the value of the house going up as your only way of making money.

yes he is losing money per month. if he was covering the interest and actually getting some money back over that then a case could be made for it being an investment.
the figures here do not make investment sense - IMO

Best case, you’re purchasing out of available cash, worst case, you have to borrow to fund the initial purchase and will then have to factor in at least the interest on your initial borrowing or possibly the interest and capital repayments (depending on whether you have an interest only or “traditional” mortgage).

Then, legal fees, furnishings, maintenance, upkeep and repair costs, unlet periods, charges if you use a letting agent, local authority charges (unless you pass them on to the occupier), insurance and then you need to pay tax.

After all that … then you know what the real yield is.

Blue Horseshoe

The alleged rent falls short of the interest only mortgage payment and a long way short of the full mortgage. This house is ideal for somebody desperate to move from a houseshare where he only has 33% responsibility to a houseshare where he has 100% responsibility. He’ll also be competing against the 5 3-bed houses (out of 17 in Sallins) that have a lower asking rent.

Purchase price 360,000

Stamp Duty 16,450
Furnishing 10,000
Deposit 36,000
Purchase costs 5,000
Total Cash Investment 67,450

Mortgage 324,000
Mortgage cost (IO) 15,840
Maintainance 2,000
Void 1,200
Annual Costs 19,040

Rental Income 14,400
Loss of Capital (12 Months)29,160
permanent tsb / ESRI House Price Index. Measuring the rate of growth in the 12 months (year on year) to January, national prices were down by 8.1%.
Return On Cash -50%

Ah, OK. I’ve got it now. I was always looking at the yield figures and going WTF?

This amateur landlording is serious business. :stuck_out_tongue:

The expected Gross Yield is the Expected Income / Initial Cost.

Both sides of the equation require assumptions, and you have to be fair to yourself on both sides. Those who want to exagerate their yield will talk up their rent and talk down their costs.

Those who argue property isn’t a good investment will do the reverse.

To be accurate you have to.

A) Be realistic about the rent you’ll achieve. By and large EA’s trying to sell a property are no more realistic about the rent it will achieve, than Lynx are about the effect on women that their sprays will achieve.

B) Factor on ALL the costs. This isn’t a Ryan-Air flight you’re buying. Looking at a headline figure and ignoring other unavoidable costs is fooling nobody but yourself. You have to include:

 Stamp Duty
 Legal Costs

These are up front unavoidable costs and are every bit as much part of the Gross Yield as the cost of the house.

The cost of furnishing the house also needs to be included. If you are going to assume you can get €1200 a month in rent, but to get it you need new furniture then you have to include the cost of the furniture. If you want to ignore the cost of the furniture then calculate the potential income based on the place being unfurnished. You can’t have it both ways.

To put it another way, if you could buy a house for 100K but it would only be inhabitable after another 100K of renovations, you wouldn’t calculate the Yield using the rent earned after renovations, but using the 100K purchase price as the cost. You’d include the cost of renovations. Furniture is exactly the same.

It’s fair enough to ignore interest and income tax in calculating the Gross Yield. Interest will vary from person to person and house to house depending on how much you want to borrow, how much of a deposit you have, and what Loan To Value your deposit gives you.

Gross Yield is like a filter to help you weed out the places that are just bad value, or spot places with potential.

BUT…

You DO have to consider things like Tax and interest when you get down to the nitty gritty of figuring out if a specific property is good value FOR YOU. If you are borrowing most of the cost of the house, and the Gross yield doesn’t even cover the interest on the mortgage, and there’s no capital appreciation to compensate you, then the property is not good value.

If you can earn more from a deposit account than you can from a house, then the house is not good value.

The property in this article is not good value.

-Rd

Exactly, you either beat your cost of capital or look at the opportunity cost…

And let’s face it, anybody who got involved with yields of 4% in the last couple of years and plenty would be far worse off than that, are in the serious brown stuff now.