Investment property in thriving midland town

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kiki35

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I appreciate there have been threads about this type of thing before, but I have a specific property I need to get response on.

Cost 190k for 2 bed townhouse (plus stamp etc)
monthly income 700 pm (near 2 local factories, and hospital, very easy to rent out apparently, but I personally fear high turnover of tenants)

we can put up 30k to cover initial costs, stamp and dep. (from SSIA and some other monies we don't need right now)

We want a long term investment (20 years or so).

We could get a mortgage for the bal no prob, as we have huge equity in Dublin home, but are wondering if this is way to go?

Is there a formula I could use? I do recall seeing one on AAB before, but cannot seem to find it.

Really appreciate any views.............
 

Try this formula : Leave well alone until full brunt of current rising interest rates kick in. Sit back and chill. Then...Hey Presto....before you know it the ass is out of the market and you'll probably pick it up for 40% less.

More seriously, What in hell appeals about a residental property offering a gross yield of 3.75% before letting agent fee, voids, repairs and wear & tear and likely the grief - in a midlands town in Ireland.
 
What in hell appeals about a residental property offering a gross yield of 3.75%
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the leveraged return of circa 18-20% pa gross on deposit based on mortgage amounts is probably a key one?
 
Just reading the original post and everything you say suggests to me that you are looking at Tullamore.

If the thriving midlands town you refer to is Tullamore then take note of all the new properties coming on line and developments beyond Tullamore nearby. If it is Tullamore then there is a good chance that you will have high turnover of tenants(speaking from experience with family members).
If it is a two bed townhouse in Tullamore expect a monthly rental of 600-650 with 1 month un-occupied each year.
I have no expectation that rents will strengthen in the long term.
Adjust your calculations to allow for one month vacant and two payments to the PRTB each year - also allow for letting fee to auctioneer as you won't be there to let/vet the tenants.
 
thanks for responses. It is not Tullamore.

when you say 3.75%, how are you working that out? That is the formula I need!
 
Hi Kiki,

AFAIK the formula for yield is:- annual rental divided by cost of property, multiplied by 100.
 
markowitzman said:
the leveraged return of circa 18-20% pa gross on deposit based on mortgage amounts is probably a key one?
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How are you calculating this? The only way to get a return out of leveraging the investment is on the margin on income yield versus interest on borrowings. The margin here doesn't look like it could give the return you are quoting.
 
liteweight said:
Hi Kiki,

AFAIK the formula for yield is:- annual rental divided by cost of property, multiplied by 100.
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Should that not be annual rent divided by current value of property, multiplied by 100.

Otherwise a house bought in 1978 for 3k could be making a yield of 40-50%!!!!
 
conor_mc said:
Should that not be annual rent divided by current value of property, multiplied by 100.

Otherwise a house bought in 1978 for 3k could be making a yield of 40-50%!!!!
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Liteweight is correct, though I'd also include your initial transaction costs within the cost of the property (stamp, ea fees, etc) and also take away any management fees from your rental figure.

In your example (house bought in 1978 for 3k could be making a yield of 40-50%) the current owner would indeed have a yield of ~50% but if someone was to buy the property of him today for 100K that person would have a yield of ~3%.
 
By 'cost of property' I meant all costs associated with its purchase. Sorry, should have made it clearer.

The only reason I can see that you'd do the math on current property price is to ascertain whether, if you cashed in, your money would make more elsewhere.
 
What the yield is is pretty much academic anyway to the original question. There are any number of ways to work out the yield, but to my eyes there isn't really a magic number that this will return to you which will determine if your investment is a viable one or not. Something like 4% good, 2% bad.

It seems investors banking on significent capital appreciation take absolutely no heed of yield, and in many cases haven't even bothered to rent the place out in the last couple of years. If you are investing because you share this optimism then it shouldn't matter what rental return you achieve.

If you are less optimistic on capital appreciation, without even asking why you would then buy in the first place, then you should be looking to achieve a return on your investment of, in my opinion, 5% greater than the rate of interest you pay. So in or around 10%. Return should reflect risk. Traditionally this is the return that landlords looked to achieve before property values started increasing exponentially.
 
Very good points Howitzer. I know people now who only take what they have put into the property i.e. 30K in the example above, let the property for the amount they pay in interest (thus cancelling it out), and calculate how much the initial deposit would have gained in the best savings/investment scheme, as opposed to the capital appreciation of the property!! Depreciation on furnishings, management fees, insurance etc., never seem to enter the equation for them!! This is ok, I suppose, in the recent heady days of capital appreciation but as a long term plan, I don't think so.
 
Appears a little dangerous to me to be counting on cap.appreciation from where we are at in this stage of the property cycle. Acquisition costs for an investor @10% ( Stamp 9 + Legal + Surveys + Loan Arrangemen Fees + Etc), then the disposal costs of say 2% ( EA + Legal). You need 12% increase just to stand still. Would'nt be banking on any increase from here on in for a while. Using an assumed increase in cap.apprec. to flatter the return on the deposit you put down on an investment should be balanced against the not improbable risk of a fall in the property value and wiping out your deposit or even more.
 
160k at 3.75% interest only is 6k
10 months at 700pcm equals 7k
assume property does not appreciate return on deposit is 3.33% gross
at 1% appreciation 9.6% gross
at 2% 16%
at 3% 22% return gross on returns less than inflation.
You need 12% increase just to stand still.
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based on my figures above you need no capital appreciation to stand still?
 

10 months at 700pcm equals 7k - Management fee (700?) = 6.3K

Interest rise in October IO mortgage @ 4% = 6.4K

So in October you'll be making a loss.

Interest rise in december IO mortgage @ 4.25% = 6.8K

By middle of next year IO Mortgage @ 4.75% = 7.6K


So you do need capital appreciation to stand still, without even including stamp or fees (12% is a miscalculation by Fat as it seems to assume a stamp duty rate of 9% when it should be 3??)

I can understand your mindset as interest rate movements are probably alien to most investors who've got in in the last 5 years but as an investor, as can be seen from your example, mortgage interest is you single biggest expense. When this doubles in 18 months you need to redo your numbers.
 
Howitzer said:
So you do need capital appreciation to stand still, without even including stamp or fees (12% is a miscalculation by Fat as it seems to assume a stamp duty rate of 9% when it should be 3??)
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I stand corrected on the use of SD @ 9% for the value of the property £190k. Honest mistake Guv !
 

Yep, that's why I'd think it'd make more sense to use the current value. Otherwise it's impossible to use yield to weigh up the risk/reward of the investment.

Going back to my 1978 €3k house, assuming mortgage is all paid up and no capital appreciation, you could end up comparing rental income of 1000p.m. as ((1000 * 12) / 3000) = 400% yield versus simply sticking the proceeds of selling the house in a deposit account and getting €500 per month in interest at 3.5%.

Actual income from deposit account is half of rental income from house, but the interest rate is 3.5% versus 400% yield on the house.

Anyway, that's only my understanding of it, I'm willing to defer to the more knowledgable and experienced. By the way, figures used above aren't necessarily accurate.
 
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I have to admit that I don't really understand your logic.

If I had a property, purchased at 3K with rent of 1K per month, I'd imagine it's all reward and no risk! Perhaps you could clarify a bit more?
 
liteweight said:
I have to admit that I don't really understand your logic.

If I had a property, purchased at 3K with rent of 1K per month, I'd imagine it's all reward and no risk! Perhaps you could clarify a bit more?
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Ah, but the 3k you spent on the house is irrelevant.

Say it's current value is 200k. You could sell up and stick that 200k in a deposit account and earn €500 p.m. for arguments sake, but your 200k is protected i.e. zero risk (ignoring inflation for now).

But the house that's currently worth 200k could possibly be worth only 180k next year.... which is a risk. The reward for that risk is that the 200k is earning €1000 per month, rather than €500 on deposit.

If rental yield is to be compared to interest as a means of weighing up different investment options, then rent has to be compared to current price and not original price.

Damn, I've just copped my mistake in previous post. €1000 per month on an orginal price of €3k is a yield of ((1000 * 12) / 3000 ) * 100 = 400% not 33% as I said. Have edited previous post now.

Personally, I can't see the point in even bothering with that calculation against original cost - I can't see what it says about the quality of the investment.
 
conor_mc said:
Damn, I've just copped my mistake in previous post. €1000 per month on an orginal price of €3k is a yield of ((1000 * 12) / 3000 ) * 100 = 400% not 33% as I said. Have edited previous post now.
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Not fair......I spent ages trying to work it out!!
 
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