Hi Jeremy,
Thanks so much for getting in touch! The article on maximising yield with under £100,000 to spend has been one of our most popular. Your letter encapsulates so many of the queries I get from first-time buyers and investors, so I thought this was a good opportunity to give a thorough answer to this.
Know your number
The first thing to do, before you start flicking through brochures or scouring PropertyPal is to find out how much money you will have to play with.
Talk to a good mortgage broker; they are bound by a lot of strict rules meaning they can’t get you a mortgage without proving that it is suitable for you. This is what went majorly wrong at the time of the last property crash in 2007/2008.
So start your journey off by working out exactly what a bank would lend you - you can (and should!) get something called an agreement in principle before you even look at a property. It sets a ceiling as to what the banks would find affordable for you, and that’s very useful as a guideline - it gives you your budget.
The banks these days prefer to see no more than a 75% loan to value – so if the house costs £100,000, they like to see you putting in £25,000 and then they lend you the balance.
This means that from their point of view, you have a substantial amount of money 'at risk' too, meaning you are less likely to default. You have 'skin in the game' as the saying goes. This makes good business sense for them – over the course of a typical mortgage, the banks usually receive three times the amount that they lent... but only if the lender keeps paying; hence the checks on you at the start.
Yield vs Capital
So you’ve got a budget of £100,000 and now you want to get the best property for your money, but there can be several ways to judge “best”.
Best for investors usually means a return on their investment; they know that if they put £100,000 into the bank, they will receive only £1000 back per year at today’s rates, so a 1% return on their money – not great.
This is what’s meant as the yield and most investors in property want a gross yield of 10% or as close to it as possible. Refer back to my handy Rental Yield Calculator for more on this. Basically, they want the property to 'pay them back' 10% every year of their total investment.
An experienced investor knows that at that yield level, once they take out costs such as rates, agents fees, repairs etc. – they can expect a net return of say 5 or 6% - which is obviously much better than the money in a savings account earning 1%.
They will also expect some capital appreciation i.e. that the value of the house will rise over time – let’s say it goes up 2% per year – then that adds to the return on the investment from their point of view.
If the property isn't in a great area, they might not see much rise in value, but if it's a popular rental area then the high yield may provide a high enough return for them to be happy. This can be the case in some Belfast housing estates for example.
Location, location, location
Being close to good areas and expanding cities is always a plus because they have no choice but to expand in your direction.
In one of my recent blog videos, I highlighted a property in the Markets area beside the former Central Station because it's right beside huge office buildings at very high value. I predict they will increase in value as more and more pressure grows for more office space.
In those examples, the investor is purely looking at the economic factors but another way to look at it is from a social point of view – i.e. as you have stated, that you might like to live in the property too.
Properties in the most desirable areas are obviously very popular and people aren’t solely looking at the property from an investment point of view. A penthouse apartment in Margarita Plaza in the city centre might cost £400,000 but the rent might only be £1,500 per month. It's a highly desirable property (and a lovely place to live) but a poor return on the money, especially when compared with what else you could do with the money.
- £400,000 = 100% therefore 1 per cent of this is £4000
- £1,500 rent = £18,000 per year rental income
- £18,000 divided by £4000 is 4.5%
But remember that’s gross and now you’ve got to take costs out of that (including service fees for the block management scheme) so you could be back down to a 1 or 2% return overall.
Let’s say you bought 8 little terrace houses with the same money (£400,000) at £50,000 each - each earning you £425 per month
- 8 x £425 = £3400 per month – that’s £40,800 per year
- £40,800 divided by 4000 = 10.2% gross yield
Yes, there’s still costs such as rates to come out of this but this time no service fees for the block management scheme.
Landlord duties
Some investors want agents to find them an investment property giving a good return and will pay an agent to search the market for a suitable property for them – fees can range from £3,000 to as high as £5,000. These are typically persons earning high salaries usually in major cities around the globe, who want their money invested back home – so London and Dubai would be two common examples.
A good agency should be able to help you in the search for the right property and will often waive these fees if you agree to employ them to manage the property for you. Thus, removing the dual headache of finding the right property, and of finding and managing tenants.
Quick recap of the key points:
- Find out what your actual budget is first - go to a mortgage broker.
- Yield vs capital - what type of investment is most important to you?
- Location: A pure investment or somewhere to live in the future?
- Find a smart way to source and manage the right property and tenants.
I hope this was useful to anyone considering entering the property market and/or the property investment world for the first time. Let me know what you thought, and if you have any follow up questions, I would be only too happy to answer them.
Join the conversation over on Facebook, Twitter or Linked In, or drop me an email - you'll find the links in the top right-hand corner of this page.
