Hi,
I'm sure I've seen this before somewhere but can anyone tell me the quick calculation used work out if a property is worth buying for rental purposes taking into account the purchase price and expected rental income?
Many thanks
Property Rental Income VS Purchase Price
Apr 19, 2006
11 Replies
Divide the purchase price by 144.
Thanks for your reply,
could you explain how this works, and how I evalute the result of this calculation please?
To get the Yields you do:
(yearly rental divided by total value of house) times 100.
Hope this helps.
Andy
Depends whether you're investing for income or gain, and buying outright or with a loan.
Take the expected annual rent and divide it by the property value. This is called the yield. Depending on location and market this could be as low as less than 6% and more than 12%. Multiply by a fiddle factor to take into account the extent of likely voids. This could be as small as 10/12 if, for example, you let to someone for 6 months and then they move out and you take a bit more than a month to find replacement tenants. So your 6% is now 5%. [It could be worse - you might not get *any* tenants].
Deduct expenses: Insurance. Gas certification. Letting agency fees unless you self-manage. Miscellaneous repairs and provision for routine maintenance and redecorating. Budget 20% for agency fees, so your 5% is now 4%. No, sod that for a lark. Fire your agent, and do the work yourself [no pain, no gain] and keep it at 5%. Insurance etc brings it down to, say, 4.5%.
So ask yourself whether you could get 4.5% for your money much easier by simply depositing it with a bank, and the answer is probably yes. So you need to look for much higher yields than 6% to make it all worth doing.
If you need a loan, it's even worse. Say you borrow half the purchase price, and loan interest is charged at 6%. That reduces your 4.5% to
1.5%, but you're only putting up half the money, so your return on invested capital is 3%.But now factor in expected capital growth [or loss, if you expect property values to fall]. Any of this is added directly to your return, so if you expect values to go up 10% a year, your no-loan
4.5% becomes 14.5% just like that (only you don't see the extra 10% until you sell - or remortgage if you're a daredevil). But this, unlike the revenue stream, improves with a loan. The key word here is "gearing". If you only put up half the money and borrow the rest, the 10% gain represents 20% of your investment, so your 3% becomes 23%.If you only put up 20% of the capital, the 10% becomes 50% but as you're borrowing 80% of the price at 6%, that represents 4.8%, so your
4.5% basic rental return above becomes -0.3%, representing -1.5% of your investment, so you're losing money hand over fist until you sell, at which point your profit becomes 48.5%.Do you get the general idea?
If you divide the price by 144 you get about 7%. I think he means that this represents a watershed figure. If the yield (annual rent divided by price) exceeds this amount, you'll probably do OK, and if not, you probably won't.
"Ronald Raygun" wrote
Eh? Isn't it rather 0.7%?!
Bah! What's a mere factor of 10? Maybe he meant to divide by 14.4.
Oops.
No, he probably meant to divide the price by 144 to get the watershed *monthly* rent. That would correspond to an 8.3% yield, which also sounds reasonable. Probably a bit more realistic than 7%, in fact.
"Ronald Raygun" wrote
The difference between buying or not? ;-)
"Ronald Raygun" wrote
I wouldn't know why he'd choose that figure, though...
"Ronald Raygun" wrote
That's what I thought - a clue being in 144 being a multiple of 12.
"Ronald Raygun" wrote
That's better!
Bollox! The percentage is dependent on the price you are dividing into. Go back to skool yung man and learn proper. Irma
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"Irma Troll" wrote
Care to explain how on earth you get that?
For instance:- If price is 72,000 then dividing by 144 gives 500 which is 0.7% of
72,000. If price is 144,000 then dividing by 144 gives 1,000 which is 0.7% of 144,000. If price is 288,000 then dividing by 144 gives 2,000 which is 0.7% of 288,000.In other words, the percentage is **always** 0.7%... How could you possibly get any other value?
It wasn't a troll, honest - just had a heavy night last :-) Irma
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