Rental Returns Are As Critical As Ever
Rental Returns Are As Critical As Ever
One of the big reasons we have so many distressed sellers right now is because people have bought properties and then been unable to service the debt.
Ie they have been unable to pay to cover the cost of borrowing.
Why has this been the case?
Generally banks and lenders have been too complacent when lending money to investors.
They have lent money to people who have been unable to pay this back as neither the rent or their personal funds have been able to cover the level of borrowing they have.
Lenders were too keen to lend to people based on self certified mortgages and rental coverage of just 100%, and when properties stopped going up in value, or when an investor had quite a few voids at once, repayments suffered.
For instance on a property valuing to £100,000, banks were willing to lend 85% of the value to an investor ie £85,000 at 5% interest only if the property brought in say £354 a month rent.
Now this would generally be fine, but at higher value properties, say at £200,000 then this was tougher to achieve ie the mortgage would be £700, and if the rent ended up only being £650 and then from there you had to take management fees and service charges from this you would have to supplement the rent to cover the mortgage by around £150 a month. If you have too many properties like this then is very difficult to sustain.
You then need to try to sell, but to make things attractive for the next investor/first time buyer would need to sell at a reduced price.
Whereas if you have bought a property giving a high rental yield – ideally of at least 135%, then you should be well protected from voids/maintenance as long as followed the other rules initially about choice of location!
If you cannot get the rental yields to work, don’t try to force them! Find an area where the rents do work...! Rental yields should be your biggest priority when choosing a buy to let investment. High yields will always work very well for you.
Alan Forsyth runs the two websites at www.property-investment-tips.com and www.property-investment-deals.com and send s out weekly newsletters to over 8000 subscribers – sign up for free at both sites! He also writes for several property magazines and gives free consultations to investors – for more information, email info@property-investment-deals.com or call 0115 9474155.
