Is rental yield really that important? This is a question I’ve found myself asking time and time again lately as I talk to property investors and landlords with properties to rent or let out in Leicester. The conversation usually goes along the lines of an investor saying to me “the yield is too low, the numbers don’t stack up. Up North, I can get double the yield!”
I argue this isn’t a great measure of investment potential. Let me explain;
A straight buy to let in Leicester will get you anywhere between 3-6% gross at average sales value, depending on investment strategy and many other factors. Most investors who focus naively on yield, whilst disregarding more important factors, probably wouldn’t touch this sort of yield with a long stick and that’s OK because it means there are larger opportunities for those investors who aren’t basing their investment decisions on the rent received as a fraction of the cost of purchase – this isn’t how businesses are run.
So, are yields telling the full story or are investors being misled? We think high yields paint a pretty picture of high performance in our portfolio of rental properties but the reality is, they don’t really tell us much beyond expected achievable rent per year as a fraction of the cost of purchase… We will come back to this in a second.
At Harry Albert Lettings & Estates, we focus on cash flow and less on yields, more on maximising revenue and creating an income which most of our clients reinvest in further properties or other projects and its vital to understand that, whilst yields aren’t as high in other areas of the country, Leicester is a solid market and good quality homes are in high demand. My own thoughts are, if you’re buying a cheap property which isn’t great quality, making it a reasonable quality, where its durable, cost-effective over the long term and is somewhere long term tenants want to make home is going to cost a lot more than the average house that’s in good condition needing minimal work.
Long term tenants mean fewer voids and lower tenant turnover which keeps costs down for you as a landlord and revenues up and that’s what you want as an investor and business person, after all, what’s the point in being an investor if the investments aren’t making a profit? They might have a high yield but profit is what moves mountains and grows wealth!
So, let’s go back to yields. High yields make your investments look high performing but being a landlord is a business, after all – your investments, whilst a pretty picture of high performance is lovely, the reality is profit is what keeps the wheel spinning!
Gross yields really just show how much rent you’re earning as a fraction of how much you paid for the property and doesn’t take into consideration the local market, the probability of voids, the quality of tenant, average length of tenancy, potential risk in terms of repair costs (think subsidence, flood damage, etc) and other eventualities.
When it comes to investing in new areas, your best bet is to go for good quality homes with good cashflow from property, and you’ll achieve this with letting agents who negotiate your costs down with suppliers, keeps fees fair, transparent and easy to understand with no hidden costs that eat into your profits and one who can spot opportunities to maximise the revenue your business as a landlord earns.
Harry Albert Lettings & Estates, for example, either breaks even or makes a loss on letting properties if we manage them, depending on number of viewings it takes to let the property – this means we have no vested interest in bringing tenancies to a close early so we can earn our relet fee or tenant fees (which have now been banned in most cases), we typically charge our fee on rent collected, meaning when you don’t get paid, we don’t get paid (we have skin in the game when it comes to finding reliable tenants that way), the only time we do charge if where work involved becomes excessive, such as complex eviction cases or we are project managing a large job, such as conversions and building works. By operating this way, in partnership with our clients, we shoulder some of your burdens.
Forming partnerships like these with local letting agents and estate agents who act in your best interest, of which there are many like Harry Albert Lettings & Estates, agents like us are just not always easy to find, means you can keep your costs down whilst achieving a reliable revenue stream and ultimately, this leads to increased profits which you could choose to invest in expanding your property portfolio quickly.
The difference between profit and yields is profit is cash in your pocket, yields is a lottery.
Let me put it into perspective, if you have a 10% gross yield on paper, but 2months of voids and 4months of rent arrears before eviction costs, to have another 2months of voids, coupled with inflated repair costs where contractors are charging you the referral fee they’re paying to your agent, or where you’re being taken advantage of by tenants and workmen because you can efficiently self-manage, your net yield at the end of the year could fall well below 3-6%…
Suddenly that cheap property you brought in a terrible market your agent was less than forthcoming about with a fantastic yield of 15% isn’t looking too attractive now, is it?
It’s a controversial viewpoint to have, to focus less on yield and more on the actual money in your pocket. Yields are great for bragging rights, but they’re not the best for realising cash from the property deals you purchase. Of course, if you want help finding the best property investments, we’re here for you. Just give us a call on 0116 321 4970!