Updating post from Reddit.

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QUESTION
Posted by Fuzzy-Music1112 2 months ago
London rents vs purchase price

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?

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Posted by intrigue_investor 2 months ago

>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

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Posted by Silverdodger 2 months ago

One word: crypto, it’s the only way out of the trap

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Posted by TokyoBaguette 2 months ago

Rental yields are low - been for years... I'm sure someone will explain why it makes sense in a portfolio though.

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Posted by The_London_Badger 2 months ago

Yep the problem is the chronic undercutting of wages. 26 years of mass immigration will do that.

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Posted by Silverdodger 2 months ago

lol, Farage is in the room. Nothing to do with stagnant inflation and wages not rising, nah. Brown people it’s your fault. BTW, how’s Brexit working out for you?

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Posted by Gerrards_Cross 2 months ago

Why would wages rise when there are people willing to work for low wages?

Stagnant inflation? Wtf?

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Posted by wait_whats_this 2 months ago

Sometimes the idiots cross paths and we get this sort of exchange. It's like seeing a double rainbow, or the look on the face of a dog licking its wiener too soon after a piss. 

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Posted by pretty_pink_opossum 2 months ago

What exactly do you think is causing wages not to rise? 

Could it be 

> the chronic undercutting of wages

I know, I know it's ultimately the fault of the business owner for hiring the person who will work for minimum wage rather than the person who wants more to do the same job 

>stagnant inflation 

Is it stagnant or is it inflating?

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Posted by HighLevelDuvet 2 months ago

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.

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Posted by chamanager 2 months ago

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.

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Posted by BevvyTime 2 months ago

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.)

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Posted by chamanager 2 months ago

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.

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Posted by HighLevelDuvet 2 months ago

Why?

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Posted by phpadam 2 months ago

Interest Rates are set to controll inflation, never-say-never.

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Posted by BaBeBaBeBooby 2 months ago

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.

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Posted by Manoj109 2 months ago

I did well out of London BTL. Mainly from the growth of house prices over the last decade and a half. But I agree with you BTL in today's environment is a bad investment not just in London.

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Posted by Mysterious_Act_3652 2 months ago

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.

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Posted by Due_Pen8911 2 months ago

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.

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Posted by Dry_Bumblebee1111 2 months ago

>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. 

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Posted by williamjohnsj 2 months ago

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.

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Posted by Robotniked 2 months ago

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.

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Posted by Jakes_Snake_ 2 months ago

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.

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Posted by BlueFriedBanana 2 months ago

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

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Posted by londonllama 2 months ago

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.

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Posted by morewhitenoise 2 months ago

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!

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Posted by phpadam 2 months ago

Profitable? Sure has been, the argument is it could be MORE profitable elsewhere.

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Posted by DistinctEngineering2 2 months ago

Let's in London have obscene long-term asset appreciation. The rental profit is a bonus..

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Posted by Succotash-suffer 2 months ago

London is not great for yields, but it can vary. I have a rental in SE18, purchased for £200k (worth £300k now) and it rents for £1600. Thats 9.6% or 6.4% depending on which figure you use.

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Posted by EnvironmentalRate853 2 months ago

You need to factor in capital growth as well as just rental yields. The houses will be high value if they are freehold, but that not worth much to a tenant..

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