Updating post from Reddit.
I was looking at houses in London. Just to buy to live in or go rent out. It was amazing to me to see the prices of some of the properties in nice parts of town in comparison to the rent.
In Barnet people are renting out a place for £5k a month or asking £1.7m! That's a gross rental yield of 3.5%!! Net of prob 2.5% after voids and expenses pre tax. Another one 6k PCM for 1.85m. gross yield of 3.9% net yield of 2.9?
Literally you would make much more money in the bank. I know rent increases for new lets have basically stopped now after about May time in London. So even after big rent increases and house prices flat lining, yields are still incredibly low.
Flats are better 2.5k PCM sell for 550k which makes more sense. But houses in good parts of town are an absolute ripoff!!
Does anyone else find this who is familiar with these markets? Have I got that right?
>Literally you would make much more money in the bank.
indeed, however there is a lot of city money across banking/law where houses in that range have been bought as a family home, and then the opportunity to move abroad for work for x years comes up > and the property is rented with profit not a priority
anecdotally from people I know I imagine that accounts for a significant proportion, I am one of said people
Rental yields are low - been for years... I'm sure someone will explain why it makes sense in a portfolio though.
The landlords didn’t and are not buying at at todays prices.
They bought 25% cheaper, making their yield ~ 33% more than you’re perceiving it today :)
That turns 3.5% yield into a nice 4.55%.
Also, stamp duty has already been paid, and CG on disposition would also be due.
May as well stay in the market.
If interest rates come down, prices will rocket.
But interest rates will not come down, or at least not to the levels we saw from 2008-2022. This period was a historical aberration, rates were lower than they have ever been since the foundation of the Bank of England in 1694. Rates have never been below 2% before, even during WW2, and are very unlikely to go below that level again. They might drop another point or so from where they are now but sub-4% mortgages have gone and won’t be coming back.
Why?
I know someone who remortgaged at 3.7% two weeks ago…
Deals are out there (I imagine in a very specific set of circumstances, but still.)
I guess a 3.7% headline rate would have come with a pretty hefty upfront fee, the days of virtually free money really are over but it will be a few years before this sinks in, especially to people who entered the market since 2008.
You probably have got that right and it seems hard to justify. Compare those awful yields to a low cost global index fund over the last few years and its even worse.
>houses in good parts of town are an absolute ripoff
Good parts of town will be priced differently than other parts of town.
Ripoff depends on your budget.
A house in London will also have capital gains to top up the rental yield.
Interest rates have only gone up in recent years too, so 3.5% was better than 0.5% on your cash.
In addition, rents will keep motoring up vs his initial capital injection (which could be leveraged with a mortgage.)
Don’t worry, nobody is getting poor owning £1.5 million houses in London.
London is affected by property being used as a store of value. Capital growth expectations do factor, although many investing are incurring gain via tax avoidance, evasion, money laundering, or other reasons that have a monetary value to some people that they accept low incomes and low capital gains.
BTL in London is a terrible investment idea. Buying to live is generally sub-optimal given high purchase and transaction costs vs rental cost. London housing market is fubar.
Investors in my area complain a 5% yield is low on a sub 200k property.
Being a LL with a mortgage hasnt been profitable for a long time!
Think everyone is missing the real reason why rental yields are rightly low, very specifically in 'nicer areas'
People who can afford to live in these areas don't rent, they buy. What multi-millionaire is renting as their full time place?
Secondly, who is looking to rent out a £1.7mm house that isn't a multi-millionaire? Very few people.
The supply/demand of these houses is much more skewed that there are more buyers than renters, hence the low yield.
The inverse is true for cheap properties targeted at lower/middle income persons. There's an extortionate amount of people who can't buy, so there are far more renter's than buyers at a given property price range, hence the rental yields are significantly higher
You have to consider the whole life cost of that investment. If someone bought 15 years ago and paid 30% less, they probably have a small mortgage left and the ‘yield’ is significantly higher, plus with London property prices they have benefited hugely from capital gains and have a high probability of continuing to do so.
Most properties rented in Barnet were purchased years and years ago so I’m guessing you’re only calculating your potential yield. For you at the current prices it makes little sense as investment to rent unless you live in and then rent it out for whatever your reasons. If you live in London and are financially ok then property as investment makes more sense outside of London. We have one locally and otherwise 2hrs away. London yields more overall as rents are higher but the rest have good yields but lower overall amounts.
The thing to consider is not just rental yield now, but to think about average rental yield over a longer term, perhaps 25 years...
Gross simplification:
Whereas your principal should only get smaller, over the longer term, one would expect London rental prices to go up. If you don't expect that to happen, then you should steer clear.
London investment property vs Money in the bank comparisons also need to factor in projected capital growth (again, this is up to you to make a decision on), and the being able to leverage your money through a mortgage. Downsides include stuff like CGT on disposal, can't use wrappers like ISA, SIPP, etc... You have to to do some maths based on educated assumptions.
I have a mixed portfolio of property, and diverse index funds. By the time of retirement I'm projecting the property to do better - but clearly that could change.