The Power of the Yield
January 2, 2019
For most of us, the monthly salary is like the old-fashioned egg-timer, it starts out sitting pretty in the bank balance but much like the sand in the little glass jar it soon finds its way out and filters away to nothing.
Monthly salaries, again for the majority, are our day-to-day living life-blood, we need them for everything - for groceries, car loans, getting to work and even socialising if there’s anything left.
At Vesta, we not only make the processes of buying and selling property less stressful, we also specialise in looking at ways to make lifestyles more manageable through the power of simple bricks and mortar. The tangible stuff.
Enter the power of the yield, an element of the property business that can pay dividends for those who understand its true value and how it can help as an investment opportunity without too much fuss.
Property, by its nature, is always deemed to be an emotive transaction for the laymen. People want to see their investment and hands-on improve and finesse elements of their purchase. But it doesn’t haven’t to be such a pull.
Playing the property game is pure business and whether we are fearful of the implications of Brexit or far too regular tax hikes, the UK remains one of the most stable economies globally, that’s why people invest here.
The yield of a property basically tells you how much annual return you can potentially make from your investment, and is calculated by a year’s rental income as a percentage against the cost of the property. For example, £650 per month in rent would be £7,800 per annum, against a property costing £100,000, the percentage of the gross yield would be 7.8%.
Through our expertise and research, gained from managing a nationwide property portfolio, remembering that the higher the yield the higher the immediate return on investment, we have found that properties in some areas in the North of the country show yields can reach 7-8%, which is considered very good.
Commonly, yields in the South of the country are lower, where 3-4% is healthy, but sell-on prices are likely to be much higher than the North. Property prices in London for example are said to double every 10 years.
Head of Business Development at Vesta, Shane Jegathjenan, says: “For most people, any kind of property business is associated with fraught and complicated processes and historically we can understand why. In fact, this perception of the complexity behind owning and managing a nationwide portfolio is exactly why Vesta exists, to take away that negative stigma.”
“The process of acquiring and then managing an investment property can actually be very simple and rewarding, regardless of its geographic location. Investment with us, in a property where the yield is strong can literally mean you, the investor, earn extra £ in the bank to cover the car, the holiday, the new wardrobe or even to put away and save from the monthly earnings. It’s a really powerful way of earning extra cashflow.”
Property Management doesn’t have to mean that the investment is within easy reach either. The misconception as an investor is that you have to be within easy reach of a property to watch over the business - commonly in the UK within a geographical comfort zone - but that isn’t necessarily the case.
At Vesta we want to encourage investors to look further afield to make the most of the yields available and we can help via our own property management services to take that pressure away. For example, investors in London should be without trepidation buying property in Bradford so as to benefit from higher financial returns and not worry about the day-to-day management.
Another quite common misconception which results in missed opportunity for a lot of investors, is investing in property outside of their geographic comfort zone. There are some fantastic and reliable returns available on equity invested in certain parts of the country, particularly in the North. With a good property management solution in place, why should the location of your home determine where you invest?
As highlighted below, a total equity investment - deposit and stamp duty - of £28,000, combined with a mortgage of £75,000 on a property worth £100,000 can realistically bring in a monthly net yield of 4.8%. That equates to £400 per month an investor didn’t have and £4,800 per annum all in the back pocket (subject to tax of course).
Property Value: £100,000
Deposit required: £25,000 = 25% of purchase price
Stamp Duty: £3,000 = Only applicable if acquiring as a second property
Total Equity Invested: £28,000 = Deposit + Stamp Duty
Mortgage Amount: £75,000 = 75% Loan to Value (LTV)
Interest Rate: 1.95% = Typical BTL interest rate in current market
Monthly Mortgage Payment: £122 = Interest only
Lettings & Management Fee (pcm): £78 = Calculated at 12% gross annual rent divided by 12 months
Service Charge & Ground Rent (pcm): £50
Monthly rent: £650 = Market rent
Gross Rental Yield: 7.8% = Total monthly rent divided by the property purchase price
Net Monthly Cash Flow: £400 = Monthly rent minus all costs
Net Rental Yield: 4.8% = Monthly rent minus all costs divided by the property purchase price
Net Yield on Equity: 17.14% = Monthly rent minus all costs divided by the equity invested
Vesta properties include tenants, rental history, surveys and optional valuation as well as a binding contract once a small deposit has been given, so no gazumping!
For further information visit www.vestaproperty.com