John, if you had two identical landlords, owning two identical properties,
valued at identical amounts with identical rents, then wouldn't you expect
the "yield" to be shown as the same on both? But with your definition, they
would be different if landlord 1 happened to buy 10 years ago but landlord 2
bought just yesterday.
Also, what happens at a "rent review"? To put the actual "rental yield"
equal to that corresponding to the "rack rent", how would you determine this
if you don't consider *current* value?
I cant disagree with any of that - but we are moving from my original
point, which is that the 10 year landlord IS getting a higher return on
his investment than the new landlord. You agree with that dont you?
Of course not. He is getting a higher return on his *original*
investment. But his *real* investment now isn't what he put in
yesteryear but what it's worth now, because if back then he paid
a fifth of what it's worth now, by not selling it now, he *has*
its whole value invested in it, not just his original money.
I take the point you are trying to make but feel this is a poor example.
For the deposit account to allow him to withdraw the rental equivalent
from the account AND have the balance increase to £100k, means that the
interest he has been receiving has, in fact., been greater than the
equivalent rental yield, because the depositor much have been
undrerdrawing the interest to enable some to remain in the account for
the balance to have grown.
No. Real time yield is the ratio of currently achievable rent
to current property value, not to what it cost when I bought it.
No it won't. Suppose I bought a BTL flat 2 years ago for £100k,
and was able to achieve a rent of £7k pa. Yield is 7%. Suppose
the flat is now worth £140k and I'm still only getting £7k rent.
I put it to you that the yield is now 5%. That's because the
figure based on the present value is the one which is really more
relevant to me to help me decide whether to sell up and stuff the
proceeds into gilts instead. It's the anticipated gilts yield
I'd need to compare with my "real time" rental yield. The price
I paid 2 years ago is not relevant.
Perhaps. How do you distinguish one from t'other? It's the
gearing, innit? Using the above example, if I have an 80%
loan on the flat, costing 5%, and ignoring other expenses,
then my return based on a 7% yield would be
(£100k*0.07 - £80k*0.05)/£20k = 15%
Incidentally, if the value goes up but the rent doesn't, then
the yield drop cancels out the value gain, so the return stays
the same. This'll be what you mean by saying "the yield to
the investor will remain the same".
Trouble is I can't improve my return with gilts because I can't
gear to advantage. I can't get a 5% loan to invest in gilts,
and even if I could it would likely cost more than they would
yield, so my return would be negative.
Hmmm. If you had put some money into a bank savings account around 20 years
ago, which has now quadrupled with interest, and the bank says it gives you
"3% interest" now, then - down at the Pub, do you say 'I put some money in
the bank a while back, now I'm getting 12% on it'?
[Eg 3% of 400(now) being the same as 12% of 100(initially).]
NO, you have forgotten that for this to happen you must be leaving the
interest in the account which means you are re-investing the interest,
which is the same as re-investing the rent into new property,
Firstly, the example is quite valid whether or not you re-invest *all* the
interest, or just *part* of the interest.
If you re-invest just *part* of the interest, then the part withdrawn can be
compared to "rent" on property, and the part re-invested can be compared to
the "capital appreciation" of the property.
Basically, in one corner you have:
(A) Property - pay a lump to buy, receive a regular income throughout
ownership, receive a (hopefully larger) lump when sold.
In the other corner:
(B) Bank account - pay a lump at start, receive interest which partly
increases the balance, the other part is withdrawn for regular income. At
the end withdraw the final balance.
There is really no difference conceptually between these two scenarios,
financially. [It may be easier, though, to reduce income & increase growth
(or vice versa) with a bank account than with the property! :-) ].
Your are right there is no difference conceptually, but the comparison
of the taking some/all/reinvesting interest is not a valid example
because ALL of the capital 'growth' from the bank account is a result of
interest. IN fact every bit of interest that is left in the account is
really a NEW investment.
Only in as much as the capital appreciation on property is also "really a
You *don't* take the money out of the bank a/c then put it back in. You
*don't* take the value out of the property and put it back in. It is
*exactly* the same principle.
I agree - *neither* the capital appreciation in the property *nor* the
increasing balance (from interest) in the bank are "new investments".
"john boyle" wrote
Er, no, not usually - isn't the *default* position to have interest
accumulate in the a/c? Therefore, no "election" necessary!
"john boyle" wrote
Perhaps - but that doesn't matter to "you" at all - the internal workings of
the asset of "bank a/c" is pretty irrelevant to it's outward properties -
all you see is the amount of your balance increasing (just as when the
surveyor/valuer tells you your property is worth more & more each time he
looks at it!).
"john boyle" wrote
Yes - exactly as the bank a/c balance is to the customer!
You devious person you, I was only referring to One of those! :-)
It depends on the account and the terms offered. One b/soc that I have
knowledge off offers the interest to be paid to any account you want on
No, you have a basic misunderstanding here between assets and income.
Your 'perception' is irrelevant. All of this thread has been based on
facts and accounting, you cant cop out now.
Yes. BUT the receipt of interest is an income & expenditure item.
Lets go back to the treatment of interest. No matter how you personally
perceive it, the payment of interest is 'income' to the account holder.
I cant help it if you cant grasp this point, but it is a fact. IN fact,
interest that has been accrued but not paid is still 'income'. It is not
a Capital Gain, Nobody regards it as so and it is not taxed as such.
Once that interest has been credited to an account, any account you
like, it is reflected by an increase in the balance of that account as a
new investment. That is a fact. Propetry value is matter of opinion.
I am not talking about how something is accounted for, nor how it is taxed.
Those two feature are, of course, artificial.
All I am saying is that the financial importance of income & capital growth
are only brought about when you actually "get the money out". If you don't
take the interest out of the bank a/c (ignoring accounting & tax) then it is
the same as leaving new equity in a property. Simple as that.
You have one "black box" - something you have put money into in the past.
At intervals, you take money out. Luckily for you, money is generated from
time to time in the box. At the "end", you can take out all the remaining
money in the box.
Now this "black box" can be either property or a bank a/c. It doesn't
matter which. Either way, you get money out regularly ("rent" for property,
or *part* of the interest for a bank a/c) and a wodge out at the end (we're
calling this capital appreciation/growth for property). Of course, you
could take *all* the interest out all the time from the bank a/c. You could
also regularly re-mortgage the property - thus gaining access to the capital
growth from that earlier than when you sell it.
Doesn't matter -- income -or- capital growth. All part of the full return!
I'm sorry if you can't follow the issues here! :-))
We have a very basic disagreement here then.
<Snipped black box comparison TOO simplistic by miles I'm afraid)
Now I agree! If you wish to ditch all that stuff in which you confuse
capital and income and just replace with one expression - 'total return'
- then I agree. I think I've already used the expression in another
post, not to you though.
ER, I think I can I'm not trying to hide them in black boxes am I?
Well, because we are assuming a *CONSTANT* return on money invested (5% in
the above example) - but you would be saying that your "yield" is increasing
and increasing and increasing ...
So, even though you are getting the *same* return now as you did some years
ago, you are going around saying that your yield is increasing. Is it just
that you want to tell people that your yield is more and more each year,
even when really it is not?
That was not the example being referred to!! [Look back, or up there ^^^!]
The 5% relates to 7K rent & value 140K.
Obviously, if the property was instead worth 200K & the rent were 5K, then
the yield would be only 2.5%.
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