Should you as a UK buy-to-Let investor worry about sub-prime fallout?

Well actually you don’t need to worry if your property is let and comfortably covering the mortgage payments and outgoings.

However, if you have bought a property which doesn’t return a ‘positive yield’, and that applies to many first time investors who thought they had the ‘Inside Trick’, only to find out the numbers don’t quite work!   Then you really need to review and decide if it’s a situation you can see through the bad times, as well as the good. Because as the old saying goes, when the USA sneezes, the UK gets a cold.

The UK housing market has been so strong for so long, property prices have increased soo much, ´Buy to Let´ properties are seldom positive yielding in real investment terms. Investors often think their ´buy to let´ is positive yielding, because the mortgage is only £XXXX, when actually to consider ´positive yield´, you have to look at the entire property value.

For Example:

A two bedroom property bought 10 years ago for £100,000 on an interest only 85% mortgage at standard ´Buy to Let´ variable rate of 7.5% (25 years), the mortgage cost will be £531.25 plus Maintenance (£100 a month) etc. a month. (Plus some letting agency fees) This property is likely to return about £1,200 a month.

Which some might call a ´Positive yield´.

However, with 10 years of price growth, that same property is conservatively valued at £300,000. Therefore,  £215,000 of equity sitting there earning only £569.75 a month. (Without even taking into account lettings and management fees.)

If you put that £215,000 into any of the widely available interest paying account at 6.3% it will pay £1,129 a month!

You see what we mean?

If for example, the property is sold, at £300,000 (Less agency and solicitors fees) £290,000. Put that £290,000 into a 6.3% account it returns £18,270 per annum, risk free and liquid.

In order to truly establish the value of the investment, we need to look at the true value of the investment, not just the mortgage cost.

With this in mind, the same property is worth £300,000, the income it still the same, but the mortgage cost of an 85% interest only (25 year) mortgage 7.5% is £1591.

If we say the gross income is £14,400 per annum. Less costs (10% agency fees and £1,200 maintenance.) net yield equals £11,760 pa or monthly net £980.00 against outgoings of £1,591 means minus £611 every month!

Meaning in truth, the proposition is ‘Negative yielding’, and not by a small amount!

Oyster International always looks at the analysis on full value and only recommends positive yielding investments.

Comments always welcome

info@oyster-international.com

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