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Rental Yield – Is it really that important?

This blog post will cover an often used term in property: Rental Yield. Search for this online and you will repeatedly read that Rental Yield is a key / important / crucial financial metric for Landlords.

But is it really? I’m not so sure. I believe it’s a financial metric that Landlords should be aware of and calculate for their own properties. But would I call it a crucial metric, or the key one Landlords should use? Nope. Frankly I think Rental Yield is overrated. Read on to find out why…

Hang on a minute, what actually is it?

Let’s start with a definition. Oh wait, its not that easy. Turns out there’s loads of different definitions of Rental Yield. That’s confusing! In that case, let me add a few definitions below:

“Rental yield describes your annual rental income, as a percentage of the total value of the property. To calculate, divide your annual rental income by the property value. Multiply the figure by 100 to get the percentage.”

Summarised as: Annual Rental Income / Property Value x 100.

“Rental yield is the return a property investor is likely to achieve on a property through rent. It is a percentage figure, calculated by taking the yearly rental income of a property and dividing it by the total amount that has been invested in that property.”

Summarised as: Annual Rental Income / total invested in the property x 100.

“Rental yield is the financial return you are able to achieve on a rental property. It is calculated by dividing your annual rental income by the total value of the property, including initial purchase and any improvements that you have made or need to carry out in the future.”

Summarised as: Annual rental income / total invested and future expected investment in the property x 100.

Everyone follow? Easy to spot which one is correct? Afraid not.  

Don’t worry, I’ve got some good news

IT DOESN’T MATTER WHICH CALCULATION YOU USE! You could argue all the above definitions are correct. The important point is that whatever method you use, make sure you apply it consistently to your own and any comparable properties. Chose one calculation, any one, and stick with it.

“For my properties I use: Annual Rental Income / Property Value x 100. Property Value is my latest valuation of the property.”

Fine, but I’m rubbish at Math. How do I actually calculate it?

Good news again. You don’t need to have a Phd in Mathematics to calculate this one. Let the Internet help you out. There is an abundance of sites where you can enter in your numbers and it will calculate the Rental Yield for you. Here’s a few you can try:

https://www.your-move.co.uk/landlords/rental-yield-calculator

https://www.landlordvision.co.uk/rental-yield-calculator.html

Got it. So what’s it useful for?

Let me give my good old friend Rental Yield some credit. It’s not a bad Financial metric. In fact, it can provide some handy information – here’s a few examples:

  • Comparison tool. As long as you apply a consistent calculation methodology, its useful for comparing the performance of different properties in your portfolio against each other, or vs a comparable property. Useful if you are buying a new property to check Rental Yield first.
  • Are rents set correctly? A low yield could mean you are not charging as much rent as you could be. Definitely worth knowing about – I’ll describe how this helped me below.
  • Mortgage affordability. Mortgage providers will use Rental Yield affordability criteria to to assess whether then will loan you money – that’s important!

Nice. What’s a good yield?

Here’s the bad news about Rental Yield (at least the start if it). I don’t actually know what a good yield is! There’s a whole range of factors that can influence yields, and make a comparison tool into something un-comparable (if that’s even a word). Here’s a few of reasons very generic reasons why they can differ:

  • Property size. Let’s take flats for example. 1 beds typically have higher yield than 2 bed flats.
  • Property type: An HMO (House of Multiple Occupant – loads of people living in same house basically) should get a much higher yield than a Single Let (property let to one tenant individual/family/couple).
  • Regional differences. Properties up North typically have higher yields than those down South.

Even within specific categories (lets say you were comparing two 1 bed single let flats in the same Town), you could have vastly different rental yields which may or may not be indicative of which property is “better”.

I sense you are just getting warmer up on the downsides of Rental Yield. Spill the beans.

Oh yes, there are other stronger reasons why Rental Yield should be taken with a pinch of salt:

  • Property Value is subjective: I might value a property at £250,000. Assuming £12,500 annual rent that’s Rental Yield of 5%. What happens if someone else (Agent, Buyer, Surveyor) values the same property at £225,000? Rental Yield increases to 5.6%.
  • Yield vs capital growth: Remember what I said above about North vs South differences. One of the reasons driving higher yield up North is lower capital growth, i.e. lower average property prices. You might have a really low yield on a property, but if the property value has increased 50% in the last 5 years, you are one happy bunny!
  • Macro market: Property values and rents and ever changing and impacted in different ways at different times by wider market events. Think generational shifts between people buying vs renting, Brexit uncertainty etc.
  • Doesn’t tell whole story: KEY POINT: Rental yield doesn’t tell the whole story. Rent contributes towards your profit and eventual cashflow (what you actually receive in your pocked) but it doesn’t capture your costs. To truly assess a property’s Financial Performance, you need to use more powerful Financial metrics.

Before I conclude, let me provide a recent example from my own portfolio where Rental Yield did however prove useful:

“The Rental Yields on my properties range from 3.9% to 5.1%”.

By calculating and reviewing my yields monthly, I was in a position to identify and investigate the reason for the property with the lowest Rental Yield of 3.9%. Rent had been static for 5 years due to good tenants renewing their contract and me choosing not to raise rents. The property value had appreciated well during this time. With new tenants now being sought, I was able to use Rental Yield as a way of helping me (not telling me) determine a new and increased rent level to advertise and eventually let the property at.

Conclusion

As a Landlord you need to know and be able to calculate Rental Yield. It has many uses. But it also has many limitations so don’t rely purely on this one Financial metric. There’s so many better ways to assess the Financial performance of your property. Want to know what they are? Keep reading this blog….that’s exactly what I plan on sharing in future posts 🙂

What do you think about Rental Yield? Time to wield the axe or give it a stay of execution? Be great to get your thoughts….

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Deposit Deductions: How to avoid a dispute EVERY* time

* I’m exaggerating! That is highly unlikely as Deposit deductions are always a contentious topic.

However, in this blog post I’ll share a real life example of my own regarding deposit deductions which concluded last week, where I’ve put into practice some of my learnings from previous mistakes. My key learnings:

  • Compromise is key!
  • Be fair (but firm where needed)
  • Don’t quibble over small amounts. Time vs money.

“A study by the leading tenant’s website, The Tenants Voice, revealed that while 70% of deposits are returned in full, 17% are returned in part and 13% not returned at all. The survey of more than 2,000 private tenants also found that 35% of respondents had previously lost some or all of their tenancy deposit.”

Before we start, lets just state some of the obvious points regarding best practice on deposits:

  • Maximum deposit capped at 5 weeks of rent
  • This must be registered in a Government approved Deposit Registration scheme
  • Certificate must be provided to tenants

The above points are legal requirements. Make sure you comply. The next one is highly recommended – in fact you’d be foolish not to do this:

  • Have a detailed Inventory report completed by an Independent Professional Inventory clerk at both the checkin and checkout. This should be signed by both the Tenant and Landlord.

Anyway, let me summarise my experience ever the last few weeks. Every email is real, including numbers. Obviously no names or confidential data is included. Please read and share your thoughts.

Background

Tenant had been in flat for 9 months out of a 12 month contract, using the break clause to leave earlier than the full term. Monthly rent: £900. Deposit registered in TDS: £1,038. Inventory report completed by Independent Inventory clerk at checkin. The same clerk completed the checkout report.

Checkout Report Summary

TO BE NOTED

The check out was carried out using the check in report dated 21st August 2019.

The property is grubby & dirty, requires cleaning throughout. The flat was only domestically cleaned at the check in.

The following differences were noted at the check out (Ive only included key points):

ENTRANCE HALL

  • The walls have further shaded usage.
  • The carpet has further grey grubby shading to the walkway and additional grubby grey spots.
  • The built in cupboard is very dusty to the interior. A few small items of rubbish has been left.

BATHROOM

  • The walls have numerous brown grubby splashes throughout.
  • The walls tiles have some scaling and some black spots to the grout.
  • The WC & Basin is scaled and dirty.
  • The bath panel has heavier water damage and cracking.
  • The bath has heavier rust marks to the edge. Scaled & dirty. Heavier black stains to the sealant edge.
  • The shower hose & head & screen have further scaling.

BEDROOM

  • The carpet has further grey shading, assorted grey spots & marks, a few small heavy black spots to the end of the bed.

RECEPTION ROOM

  • The walls have a one foot brown grubby stain by the dining table.
  • The carpet has further grey grubby shading, assorted grubby spots & marks.
  • The sofa has heavy grey spillage stains to two seat cushions, a three inch hole to one seat, further grey shading and additional grubby spots.

KITCHEN

  • The woodwork has a rust mark and is dusty.
  • The vinyl flooring has a two foot yellow stain by the dishwasher and grubby marks.
  • The sink has some scaling & is grubby.
  • The work surface is grubby. Light white saucepan heat ring mark over the washing machine.

What do I do??!

Quite a few items requiring attention! After getting a quote from a cleaning firm, I went back to the Agent who manages the property with the below proposed Deposit deductions.

  • Sofa damage £100
  • Cleaning £155 (I will offer to pay half of the £310 quote)
  • Paint touch ups £150
  • Item removal £25

Total: £430

“The old me would have gone into much more detail, costing up individual line items and reaching a significantly higher deposit deduction.”

What happened next?

Copying in the next 3 emails discussing the deductions:

  1. Tenant reply via Agent:

“Your tenant has asked if you are prepared to waive the claim for the sofa damage and paint touch up.  This is due to them believing the paint and sofa were in a similar condition at the start of the tenancy. They have agreed to £155 for cleaning and £25 for item removal. Please let me know if you are prepared to accept the £180 offered?”

My reply back:

“My deductions were based on the independent inventory report which identified areas which were in a different condition at the end of the tenancy. So not something I can or should just write off I’m afraid. However, to try and avoid this dragging on too long, I’m willing to charge just 50% of what I believe the cost will be for the sofa/painting. So total deductions would be:

  • Sofa £50 (50% of £100)
  • Painting £75 (50% of £150)
  • Cleaning £155
  • Items removal £25
  • Total: £305

The response:

“The tenant have agreed to the claim of £305 so this sum will be released to you shortly.”

The Result / Learnings

Firstly, its worth noting that this discussion lasted just 3 days. That’s pretty quick. Deposit disputes can drag on for weeks, if not months if they go to arbitration. A quick agreement saves me and the Tenant significant time and stress.

Was it fair for both of us? We’ve both agreed it pretty quickly, so a good indicator we are both happy.

Will the deposit deduction cover all my expected costs to bring this property back to its state at the start of tenancy? No. I will need to cough up some of my own funds to do this.

But here’s my key learning over the years:

  • Compromise is key! Save everyone time and energy by trying to see their view point. Move towards that point as much as you can.

  • Be fair (but firm where needed). As a Landlord, you run a Business, not a Charity. So sometimes deductions will need to be made to recoup costs you will incur. Charge for those costs without guilt. But be fair. Don’t charge more than you need to, and be grateful that to the Tenant for being a paying customer over the months/yearly – so give them some goodwill!

  • Don’t quibble over small amounts. Time vs money. Seriously, small amounts are not worth fighting over. Drop them, take the hit and move on. Stay sane.

Did we reach a fair conclusion? Please share your thoughts on the outcome. Id also love to hear about others’ experiences. The more we share on how disputes work in real life, the less grey this area becomes 🙂

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WTF is LTV?!

In property, its hard to get far without coming across the term “LTV”. LTV stands for “Loan to Value” and is something every property owner should fully understand, regularly calculate for themselves and use this knowledge to make strategic decisions which optimise the financial performance of their property/(ies).

 I sense a few red faces in the virtual blog room. A tentative hand creeps up. A nervous cough. “Erm, so remind me what LTV actually is”.

Well guess what, despite LTV being a common acronym that most property owners will have an awareness of (I hope!), its usually not fully understood, and is definitely not being used as a money making tool – as it should be.

I’m hoping I can help with that…

Lets break it down

Let’s start with an official property related definition from www.moneyexpert.com:

“The loan-to-value is the ratio between the value of the loan you take out and the value of the property as a whole, expressed as a percentage. The remaining value is paid as a deposit.”

Calculating LTV is fairly simple; just take your mortgage amount, divide it by the value of the property and then multiply the result by 100 in order to get its percentage value. As with everything in life, a numbers example makes this much easier to follow:

Say you own a property worth £300,000, and have a mortgage £240,000. Your LTV is 80% since £240,000 / £300,000 x 100 = 80%. Job done!

If in 5 years’ time, your mortgage is now £200,000, and your property is worth £325,000, what is your LTV? Well LTV would be £200,000 / £325,000 x 100 = 61.5%.

How about in another 15 years when your property is now worth £400,000 and your mortgage is fully paid off? Its 0%! You’ve paid off your mortgage so fully own your property – nice one 🙂

ACTION: Calculate the LTV for your property. And if applicable, compare this to what it was 1 year ago, 5 years ago, and when the property was purchased. If you own multiple properties, calculate the LTV for each of your properties individually, and also as a portfolio (combined mortgage amount / combined property value).

Ok I’ve got it, so why does it matter?

Well firstly, this is the key metric Banks will look at when considering whether to offer a mortgage.

Banks use the LTV to determine their risk. Think about it, you are asking a Bank to lend you money. How do they know if you will be able to pay them back? What if you can’t? They want to know their loan to you is secure. They have collateral. You have skin in the game.

Let’s jump back to the previous numbers to demonstrate this. In the first case, the Bank provides a loan of £240,000. This is secured against a property valued at £300,000 (so 80% LTV).

Let’s say you default. Does the Bank lose any money? In theory no. Because the Bank can take possession of the property and sell this for £300,000 to recover their cash. The fact its worth £60,000 more than the loan means they could sell it quicker and access the cash sooner. They also have a buffer in case property values drop – in this case the property could drop £60,000 before they made a loss.

How about if on the same property you had a mortgage of £280,000? That’s a LTV of 93%. Yes, the Bank is still covered, but they’d be more nervous lending to you right?  

Well that’s the key point. The more nervous they are about lending to you…guess what…the higher your interest rate will be. A higher LTV means more risk, which means higher interest. Stop and think about that, and make sure you follow.

So how can I use this to my advantage?

Firstly lets consider two common questions: Is a lower LTV best? Is there a perfect / optimal LTV? No and No again. The answer depends on individual circumstances, including factors such as:

  • Your current mortgage deal
  • Your attitude / comfort level with debt
  • Your cash available / need for cash
  • The performance of your property and any other assets

For example, lets say you have an LTV of 80% (property value £300,000, mortgage £240,000) and pay a fixed rate of interest of 3%. Lets also say you have £15,000 cash in a current account earning you 0.0000000000001% interest (thanks Lloyds Bank!). If you are able to remortgage and can get a better interest rate at 75% LTV (if you use the £15,000 to pay down mortgage you only require a new mortgage of £225,000), then that LTV could be a good thing for you to do.

However…if you need that £15,000 cash for something else, or can invest that at a better rate than 3%, then paying off that mortgage may not be best. Too many permutations to cover all, but you get the point!

So what can I actually do then?

Here’s some practical tips that I’d recommend you consider. Call it strategic planning to optimise the financial performance of your property if you are feeling fancy.

Note: This is not financial / investment advice. Its just things to think about – please ensure you discuss any decision with a professional advisor.

Read the below bullet points and determine if any of these apply to you, and if so, if you could financially benefit from actioning them.

  • Have you reached a lower LTV by paying your mortgage off over the years? If so, could you now remortgage at a cheaper interest rate?
  • Have you reached a lower LTV by way of your property value increasing over the years? If so, could you now remortgage at a cheaper interest rate?
  • If you have surplus cash, or are paying a higher interest rate, can you use that cash to pay off your mortgage quicker, reducing your interest payments?
  • Can you increase your LTV? Yes, can you remortgage with a higher loan, and deploy the excess cash in a higher returning asset?
  • If you own multiple properties, are you able to transfer cash between property mortgages to access cheaper net interest payments?
  • Stress test: If shit hits the fan, like COVID-19, how well prepared are you (debt / LTV speaking only here): If your property value fell 20%, what would your new LTV be? If your average interest rate increased 5%, what would your new monthly mortgage payments be?

I hope you find this useful and can benefit from it. Would love to get your thoughts on LTV, even if its just to say WTF! Good luck 🙂

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COVID-19: The final nail in the coffin for the UK High Street Estate Agent?

Even before COVID-19 changed the World as we know it, if you were to walk down any High Street in the UK, you’d expect to see a few things: A Pret, a charity shop, a £1 store (actually, probably a few of these) and of course…an Estate Agent.

High Street Estate Agents are part of our culture. As a Nation we are obsessed with property. Everyone will have dealt with Estate Agents in their lives as they help the British public buy/sell or rent property. They are a familiar sight, with their typically plush offices, smartly dressed agents and shiny mini-coopers ready to whizz you off to viewings. And whether you like them or not, lets face it, we all like browsing the adverts in their store windows.

But alas, I fear we may not see the traditional UK High Street Agent for much longer. And whilst COVID-19 may prove to be the final nail in the coffin, their business model has been in decline for quite some time.

Here’s 3 reasons why….

1) High Street Woes

Growing up, a trip to the High Street was a real treat. Shops, cafes, buzzing atmosphere. You name it, the High Street provided it.

Anyone experienced that recently? Nope, didn’t think so. Every second shop is now boarded up. They resemble ghost towns, a place you quickly hurry through on your way home from work for fear of someone seeing you there. Oh the embarrassment. Why shop on the High Street when Amazon can deliver something right to your door which is cheaper, better quality and in less time than in takes to make a cup of tea?

“Last year 284 independent high street estate agents closed their doors, making it the sector with the highest number of closures followed by newsagents, women’s clothing, fashion, delis and hairdressers.”

Well spare a thought for the endangered High Street Estate Agent, who’s home is well and truly stuck on the High Street. Locked in to paying high rents to secure the most impressive spot on a deserted street. When it comes to Business, we’ve all heard the phase “Location, Location, Location”. Well for the High Street Agent, Location was once their key selling point. Its now their nemesis.

2) Technology

Technology is great. We all use it. We all benefit from it. We are all probably negatively impacted by it (ever found yourself mindlessly scrolling through Facebook feeds?). And the property industry has certainly not escaped the Technological evolution. Let me focus on two key areas impacting High Street Estate Agents – for both I don’t even need to explain why these Tech changes are driving High Street Estate Agents out of business:

  • Online searching. If you want to move house (buying or renting), do you a) wander up and down the high street in the rain trying to find an estate agent window to look in, or b) jump onto Rightmove, add your search criteria and find suitable properties in a matter of minutes? (HINT: Tick the second box).
  • Online competition. SPOILER ALERT. You can now buy/sell or rent property entirely online. There is no longer a need to use a High Street Agent! A whole host of online estate agents have popped up (Howsy, OpenRent, Makeurmove to name a few). These can provide all the services a traditional High Street Estate Agent can offer (yes, even viewings) at a fraction of the price. You can even tailor your package to pick the exact services you want. Please read to the end of this post before you jump over to google to signup with these online agents!

3) Lower Revenue

Imagine any Business being told by the government that they are now no longer able to charge a significant chunk of their fees to customers. That’s what the tenant fee ban did last year to Estate agents. No more tenant admin fees, or contract fees, or referencing fees or any of the other fees they used to gleefully skim off tenants. How did Estate Agents react? Well some of these lost tenant fees they pushed to Landlords (don’t get me started!), but reality is, they have just had to accept reduced Revenues. That’s a bummer.

The list of nails could go on: Arguably, and in my experience, their service offering has gone down (I’ll save that for another post). A whole host of new Tax & Regulations in the property industry have made Business conditions more challenging and there’s even this thing called Brexit which everyone has forgotten about these last few weeks (can’t believe I got to this stage of the post without mentioning it) – all of which are nails that are firmly closing that coffin lid. But by now I think you’ve got the point.

So let’s jump to the humanitarian and economic crisis that is COVID-19, where Government enforced Lockdown and social distancing rules means no property sales, rentals or even viewings. Yes, Government financial support can hopefully cover furloughed staff costs and provide loans to keep High Street Estate Agents afloat for a few months. But its fair to say that losses and financial hardship for Estate Agents are inevitable over these coming months. Add this to their pre-COVID-19 challenges/struggles, and I simply can’t see many surviving this latest setback.

But wait, let’s not leave it on such a negative note. Is there a glimmer of hope for the High Street Agent? I believe there is. In fact, some (not all) could even stand to gain from the numerous challenges I’ve set out above. Who? How is this possible I hear you say? Stay tuned…I’ll be posting a High Street Estate Agent survival plan to this blog soon 🙂

Stay home. Stay safe!

Louis