There are many different strategies to consider when looking at property investment with some investors chasing the latest trends, some looking to gain a jump on the markets and others looking to take advantage of specific situations. While it would be wrong to suggest real estate investors chasing the latest trends totally ignore rental yields, they don’t perhaps give yields the consideration they should receive?
There are many reasons why rental yields should play a major role in your long-term property portfolio and why a high yield will give your portfolio backbone.
Financing your purchase
It will depend upon what type of property and whereabouts in the country it is located as to the cost and perhaps more importantly the rental yield available. If you consider mortgage rates are currently around the 4% mark if you could secure a long-term rental yield of 10% then effectively you have a buffer between the cost of your finance and the actual yield on the property. There are obviously other costs to take into consideration so the difference in this particular example may be slightly less in reality, but you get the general idea.
If you were able to secure a yield of 10% on a property then, taking all costs out of the equation, you would effectively be able to pay back the capital in just 10 years. There would obviously be interest on the initial mortgage arrangement but this perfectly illustrates the power of relatively high yields.
In the current market conditions, where base rates in UK remain firmly stuck at 0.5%, can you imagine the added value to any investor of a property with a rental yield of 10% or more. The UK is rumoured to be heading for a short bout of deflation which makes this yield even more attractive. This is where we have a ready-made exit strategy for those who have concentrated on high yield properties. There will always be demand for this type of asset because of the cushion they offer between financing the property purchase and their rental income.
Then again, if you have an array of properties which yield around 10% then in theory you will have paid off the capital in just 10 years. After this repayment period, and a little extra to cover interest, your properties simply become cash cows as they are fully paid up and still creating a solid and relatively high long-term income. Indeed, this is where many investors use this cash flow to purchase further properties to extend their real estate portfolio.
Investing on a pure rental yield basis is perhaps more of a long-term strategy than following the latest trends and trying to make a quick turn. In theory, if you’re able to obtain relatively high rental yields then eventually as rents increase you will see an increase in the value of the underlying property. This is perhaps the best way to give your real estate portfolio some backbone and a basis on which you can grow and create an acceptable return in the future.