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What Gross Yield do landlords want?

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I run an independent "not for profit" housing association that offers 5 year (renewable) lease agreements to private landlords, i.e. we lease your property on a guaranteed rent for a minimum period of 5 years.

 

We currently have a number of houses in Sheffield which we use as supported accommodation for our tenants. We are looking to take on more 3 or 4 bed properties in Sheffield for use as supported accommodation, and were wondering what sort of gross yield (return on investment) would tempt landlords to lease to us?

 

For example, most property investments work on the basis of a % "gross yield", which is the annual rental income divided by the total purchase price x 100.

 

Example:

House costs £80,000

Renovations cost £10,000

Total cost is £90,000

 

Rent is (for example) £450 pcm = £5400 per year

 

So gross yield would be £5400/90,000 = 0.06 x 100 = 6% gross yield. (This would be your gross return on investment, in this example, excluding any increase in capital value).

 

If you were to buy and then lease properties to us, what rental yield would you want? Would this be different if it was a property you already owned?

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At the moment, many will be happy with 6%. However, that is due to

current interest rates being unusually low causing poor returns on other investments.

If interest rates were to creep up, the expected yield would need to change.

 

This would be the same for property already owned, as the return is calculated on current values.

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Given the OP's example the landlord would want as much as they can realistically expect in the market, but above all else they want the property back in roughly the same condition it was leased in (taking into consideration wear and tear).

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Given the OP's example the landlord would want as much as they can realistically expect in the market, but above all else they want the property back in roughly the same condition it was leased in (taking into consideration wear and tear).

 

I realise that landlords would want as much as they can realistically get, but presumably when they set the rent they factor in void periods, tenants who don't pay, tenant damage, legal costs (for evictions etc), Council Tax while the property is vacant, etc, so the actual gross yield, i.e. how much income the landlord receives in total over a given period, is often much less than the monthly rent charged.

 

However, if an organisation were to lease the property and give the owner a guaranteed rental income for a set period of time (5 years), AND reduce the risks associated with letting to tenants, AND avoiding any letting agency fees, then I guess this could be an attractive proposition IF the rent (gross yield) is an acceptable amount. Andrejuan has suggested that a 6% gross yield is reasonable due to the current low interest rates.

 

As an organisation that is seeking additional properties to lease, and that can offer owners these benefits (no fees, reduced risks, no voids, property handed back in good condition, etc), the information I am trying to get at is what rental yield would I need to offer (in addition to these other benefits).

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6% seems reasonable enough to me. When councils approach landlords to house tenants from their long housing waiting lists, councils also offer the following:

a) pay the landlord the monthly rent, direct

b) after the tenant has vacated the property, the council freshen the property up internally, by painting it.

Do you also offer this?

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6% seems reasonable enough to me. When councils approach landlords to house tenants from their long housing waiting lists, councils also offer the following:

a) pay the landlord the monthly rent, direct

b) after the tenant has vacated the property, the council freshen the property up internally, by painting it.

Do you also offer this?

 

 

Yes, we pay the landlord owner direct, monthly in advance. Unlike the Council or any letting agent, we pay the rent to the owner even if our tenants do not pay us, or if the property is vacant (between tenancies).

 

At the end of the 5 year lease period (or subsequent lease periods) we carry out all necessary repairs and re-decoration so that the property can be handed back to the owner with vacant possession in a similar condition to when it was leased to us. Usually, we will actually have improved the property (with agreement of the owner) and added to it's capital value, as we install extra fire safety measures, and extras to add to the comfort of our residents, e.g. TV and satellite points in all rooms, shower over bath (if there isn't one already), etc.

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If you run a 'not for profit' housing association, yet you pay landlords the market rent, how do you manage to make any profit, ie. even if it's just to deal with repairs?

 

Also, what are your views on the government's plan to allow housing association tenants to purchase their property?

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If you run a 'not for profit' housing association, yet you pay landlords the market rent, how do you manage to make any profit, ie. even if it's just to deal with repairs?

 

Also, what are your views on the government's plan to allow housing association tenants to purchase their property?

 

As a "not for profit" housing association that provides supported accommodation, the way that we are funded is very different to how private landlords are funded. We calculate the total cost of providing the accommodation to our residents, including an allowance for repairs and other costs, and then base our funding requirements on this. This is how we can pay landlords (owners) a reasonable rent for their properties and also provide all the added benefits (lower risk, no voids, no fees, property returned in good condition, etc).

 

The Government's plan to allow tenants to buy their home from a housing association does not apply to my housing association (as we are not government grant funded), and it does not apply to supported housing, and it does not apply to leased properties, so in relation to this post, the Government's plan is not relevant. However, as an aside, tenants have had the right to buy their housing association properties for many years anyway, it was called the "Right to Acquire", it was just never advertised much because the discounts were not as big as those under the Right to Buy (council housing) so it is relatively unknown.

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It is not the yield that matters, but return on investment i.e. (Annual income-Annual expenses)/(Capital costs).

Annual expenses depend on whether the landlord uses an agent and has a mortgage amongst other things. It's not one-size-fits-all.

Achievable rents are more related to the size of the property than the value. They are not much different for a 3 bed ex council house of non-standard construction and a 3 bed victorian terrace even though the latter costs twice as much to buy. That has a big effect on yield and ROI.

I guess if a landlord could get the same rent guaranteed without some of the costs and some of the work they might be interested.

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The buy to let tax changes are only a year away. Anyone with 90k would be better off taking the meagre returns the banks are offering rather than invest in buy to let. Don't forget all that gross yield will be taxed as salary and in many cases will push current 20% tax payers into the 40% bracket meaning it will be a very costly mistake. Buy to let is over. Don't be the last fool.

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The buy to let tax changes are only a year away. Anyone with 90k would be better off taking the meagre returns the banks are offering rather than invest in buy to let. Don't forget all that gross yield will be taxed as salary and in many cases will push current 20% tax payers into the 40% bracket meaning it will be a very costly mistake. Buy to let is over. Don't be the last fool.

 

This is why you don't have a mortgage on the letted property and also have it in your spouse's name if they don't work so they can use their tax free allowance on income tax ;)

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The buy to let tax changes are only a year away. Anyone with 90k would be better off taking the meagre returns the banks are offering rather than invest in buy to let. Don't forget all that gross yield will be taxed as salary and in many cases will push current 20% tax payers into the 40% bracket meaning it will be a very costly mistake. Buy to let is over. Don't be the last fool.

 

The proposed tax on mortgage interest is of course currently subject to Judicial Review legal proceedings, so it may be overturned. It also does not apply to landlords without a mortgage, or to landlords who are limited companies.

 

---------- Post added 20-05-2016 at 15:27 ----------

 

It is not the yield that matters, but return on investment i.e. (Annual income-Annual expenses)/(Capital costs).

Annual expenses depend on whether the landlord uses an agent and has a mortgage amongst other things. It's not one-size-fits-all.

Achievable rents are more related to the size of the property than the value. They are not much different for a 3 bed ex council house of non-standard construction and a 3 bed victorian terrace even though the latter costs twice as much to buy. That has a big effect on yield and ROI.

I guess if a landlord could get the same rent guaranteed without some of the costs and some of the work they might be interested.

 

I fully agree, but for some reason property investments always refer to gross yield, rather than the ROI. Leasing a property to a housing association gives a stable and predictable annual income, and also very much reduced annual expenses, so this gives a much higher Return On Investment as compared to letting direct to tenants (who may not pay, or may damage the property, etc, particularly when void periods are also factored in).

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