Should I sell High-yielding Investment Property?

Hi,
January 2006, bought an investment property in Springfield Tallaght. Consists of main house and a two-storey annex, which are let separately

We had to do a small amount of work on the property to bring it up to standard before letting out, but since then no real problems.
Now both sets of tenants, for different reasons are looking to move on, which is fair enough, gives us a chance to increase rent, as we left them alone this year as they were good tenants.

Trouble is my wife is dying to sell the place, as she doesn't like the hassle (even though I deal with all of it). her opinion may be coloured by the fact that we are doing some expensive, but necessary upgrade to the main house. I'd love to hang onto the house as it is generating decent cashflow for us, and the work we are doing now will ultimately allow us to get more rent and a better price if we do sell, but.....

To keep the peace, I asked the agent what the market would be like for such a property, and he said no investors in the market now, so it won't sell.

On the latest rents, the income from the house should be coming in at 2400 per month (conservatively - may get 2550 according to letting agent). This would give an annual rent roll of 28,800. If we were to put in on the market, targetting investors, what do you think this should fetch?

What's the consensus on required yield for an investment property in an "up-and-coming" area with luas?

2400 sounds a lot for the area, there are only 2 places on daft for over 2k a month in Tallaght and they are 4 bedroom. The letting agent will give you any price to get your business so I would not bother with listening to them, look for yourself on daft and see what the going rate is.

If you can sell the place and get mortgage free I think it would be well worth it.

Well the breakdown is:
3-bed house - 1450 pm
2 bed-2 storey annex - 1000 pm

Total 2450 pm

The 3 bed and two bed are completley independent, but on same site, hence the yield.

Ahh, my misunderstanding, I didn't realies that was the combined rent.

That does sounds like a decent yield but as the agent said the market is dead at the moment and investors are not biting.

A few more questions.

Does the rent cover the mortgage?

How would you feel about negative equity for a few years?

If you are planning on holding on to it for 10 or more years and mortgages are covered then youa re safe enough, but with the way the market is going you could find yourself in negative equity for a few years. Would this be a big deal?

If you plan to sell within the next 5 years I'd get a move on selling now to be honest. There is lots of property on the market at the moment and prices will drop as that backlog clears.

You can see the increase in places available for sale here
http://daftwatch.atspace.com/

amgd28 said:

My only issue is whether even at a yield of 6%, it would be of interest to investors. What's the consensus on a 6% yield for an investment property in an "up-and-coming" area with luas?

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It's easily washing its face. You would be mad to let it go, when markets recover take some mew out of this place to buy another and build a portfolio. I would be loath to sell a self financing proposition especially in the capital. My other half though would be counting how many handbags the place was worth......? Although she is the cannier investor.

I cannot see myself being a victim of negative equity. I bought the place for a lot less than current value so my yield is actually higher.
My point is that at that yield would it not be an attractive proposition to an investor if I sold at at a decent yield percentage?
Sitting tenants, contents included, cashflow positive from day 1, what's not to like?

MichaelDes said:

It's easily washing its face. You would be mad to let it go, when markets recover take some mew out of this place to buy another and build a portfolio. I would be loath to sell a self financing proposition especially in the capital.

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Hi Michael, I know what you mean, but I am building up a business which hasa greater call for my capital and much higher potential return, so with reluctance I am prepared to wave bye-bye.
The washing its face thing - that's why I bought it in the fiurst place, I was clearing 1k per month. Even if someone were to buy from me and I made a decent profit, they would inherit a recently let property (new tenants going in), fully furnished, and significantly cashflow positive from day one. That's why I'm not sure why investors wouldn't be interested

amgd28 said:

I cannot see myself being a victim of negative equity. I bought the place for 379K, so my yield is actually higher.
My point is that at a yield of almost 6%, would it not be an attractive proposition to an investor if I sold at around 500k?
Sitting tenants, contents included, cashflow positive from day 1, what's not to like?

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What's not to like is the feeling that investors may have that prices have not bottomed and that they could get a better yield in six months or a year. As the serious investors are heavily geared, 20k difference in price = 1 less purchase (or something like that) in 3 years time. (Am I making sense to anyone else here?).

They may also be looking at oversupply in future in rental markets depressing yields (so are effectively stress-testing their yield at 1-2%).

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amgd28 said:

Hi Michael, I know what you mean, but I am building up a business which hasa greater call for my capital and much higher potential return, so with reluctance I am prepared to wave bye-bye.
The washing its face thing - that's why I bought it in the fiurst place, I was clearing 1k per month. Even if someone were to buy at 500k, they would inherit a recently let property (new tenants going in), fully furnished, and significantly cashflow positive from day one. That's why I'm not sure why investors wouldn't be interested

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amgd28,

If you can utilise the capital to better effect then I would sell - it seems your property should be a good proposition to any serious investor with a 6% yield. I know where you are coming from. I've been in this predicament before, if you can flip the equity with a better ROI then go for it. Best of luck - gut feel is always a good judgement. Finally have a bottom line price for selling - fundamentals remain good for now as long as Tallaght does'nt have a glut of new builds coming to market soon. You will get these picky questions etc.

Thanks for that MichealDes,

I'm not desperate to sell, but yeah would like to get hands on the capital to fund growth in the business, but if a seller appears, well and good, if not, will continue to hold. I am getting new tenants in in any case, and not formally putting on the market, just putting questions out to some investors that I know.

Thanks for the well wishes..

I agree with IFT re the initial costs. Also a mortgage would cost about 34K a year 2851 monthly and the rent is 2400. This is based on a 90% mortgage over 20 years with 5% interest. Higher for other investors with 100% mortgage etc. For me personally the figures don't look good even though many consider a 6% yield to be excellent. Alternatively a cash buyer - would they be happy with 6% return when you can get circa 5% nowadays in a simple bank deposit account with no hassle.......

Bronte said:

I agree with IFT re the initial costs. Also a mortgage would cost about 34K a year 2851 monthly and the rent is 2400. This is based on a 90% mortgage over 20 years with 5% interest. Higher for other investors with 100% mortgage etc. For me personally the figures don't look good even though many consider a 6% yield to be excellent. Alternatively a cash buyer - would they be happy with 6% return when you can get circa 5% nowadays in a simple bank deposit account with no hassle.......

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Well your figures are based ona repayment mortgage that doesn't make sense - interest only allows cashflow, acquisition costs are limited to transaction fees such as SD and solicitor. It seems now that where a few months ago people were viewing a purchase of a property with a 1-2% yield as an 'investment' are now shunning a 6% yield investment.

If you don't think that such a yield is good enough, then why do people invest in property, when most yields out there are far below this?

(I'm enjoying this discussion actually - good to hear the devil's advocates' point of view )

amgd28 said:

If you don't think that such a yield is good enough, then why do people invest in property, when most yields out there are far below this?

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Obviously because they are hoping for significant capital appreciation. In the present market conditions, this would seem much less likely than in the past few years.

One reason that people have been investing in property over the past decade or so is because the prospect of capital growth outweighed the poor yields available. Now that capital growth cannot be taken for granted, yields have suddenly become more important. In the distant past property investors used to look for a rental stream that covered a repayment mortgage plus an additional 25% to 50% on top.

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Bronte said:

you can get circa 5% nowadays in a simple bank deposit account with no hassle.......

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Well I don't think any bank is paying interest of 5% on deposits of 500k- please correct me if I am wrong, but isn't there a limit of approx 10K on these headline interest rates?

IFT said:

As others have pointed out this past yield of 1-2% was only the bonus as it was capital appreciation that was primary focus. Indeed many apts were bought that were not even rented out

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In general, I agree with a lot of what the posters are saying, that speculation has driven investment over fundamentals over the past number of years.
Yet, I would have expected that to be true of the amateur investor, rather than the serious professional landlord, who would ignore "Mr Market" in Warren Buffet's parlance and invest on fundamentals.
Given that this property (or, for the purposes of my argument, chose any similar property) gives positive cashflow with interest rates near or at the top of the interest rate cycle, surely they should rationally expect their return to increase in the long term? With regard to this then, if the returns are expected to increase, then is it not rational to expect the asset value to increase proportionately?

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Touché

Not everybody buys investment property with interest only mortgages. As previously stated you would need at least a 6% yield these days if you think there will be little capital appreciation. It is beyond me anyone buying a property with only 2 % yield on 100 % interest only mortgages over 40 years. That's just my viewpoint. Added to that is the large stamp duty the govenment takes. When looking at an investment property it is also good to say, if I had the money in cash and put it on deposit or wherever what would the return be there to compare it to the yield plus hassle of renting.