What would you consider to be a good yield when you go looking to buy your next buy to let property?
According to research undertaken by Paragon Mortgages, released in February 2013, during 2012 the average yield achieved by landlords was 6.3%. This is the return purely from the rent, and doesn’t include any return attributable to increasing capital values.
In Q4 2012 landlords in the East Midlands achieved the highest yields with 7.5%, followed by landlords in central London with 7%, and then the North West with 6.8%.
The yield achieved in London seems particularly high, especially as values have continued to increase in London despite the credit crunch and its effect on the property market.
Although it’s not explicitly stated in the release I’d imagine that the yields shown are for properties which may have been purchased some time ago, when prices were lower, and are not the yields one would achieve on a new purchase today. I wouldn’t expect the yield on a new purchase in central London to be more than 4%.
The other thing we need to remember is that average figures are exactly that, averages, meaning that half of all landlords surveyed will be achieving better yields than the average yield, and half will be achieving worse yields than the average yield stated.
So what is a good buy to let yield?
The answer will depend on what you are trying to achieve and why you are buying.
If you want income or cash-flow, then as a general rule you’ll want to buy property with higher yields.
If you want capital growth, you’ll more than likely be looking for property with low yields.
And if you want a mixture of both you might be looking for something in between.
It also depends on whether you are using finance to purchase the property. In most circumstances I’d suggest that you should use a mortgage so you can take advantage of the considerable benefits of gearing.
Paragon, for example, charge 5.1% for a standard variable rate mortgage so, in order to break even on the rent, you’d probably be looking for a property with a yield of around 8% (and hoping you don’t have too many repairs or voids).
Of course, one way to swing things in your favour is to negotiate a very keen bargain price, which will reduce the amount you need to borrow, reducing your monthly payments and increasing your monthly cash-flow.
Here’s to successful property investing.