When advising someone venturing into property investment this is the question that should be asked first.
Often the answer is the same “I want as much yield as possible”. Obviously. However choosing the property with the highest potential yield is not the same as getting it and many factors should be considered when choosing which property is the right one for you.
Generally the rule that applies is; the cheaper the property the higher the potential yield. But, the cheaper the property the less desirable it was to other potential purchasers and potentially the less desirable it will be to potential tenants. So your investment property at £100,000 in one area achieves a rent of £600 pcm (property A) and your £100,000 investment property in another brings you £500 pcm (property B). Which do you go for?
It seems clear which the better choice was doesn’t it? Property A brings you £7200 a year and property B brings you £6000. However the neighbours of Property A are very noisy and because of this your tenant leaves and the property is empty for a month between tenants you are down to £6600.00 for the year. Inevitably between tenants you have some repairs to take care of which are not expensive but come to £200.00, you are down to £6400.00. If you are managing the property yourself you won’t be incurring monthly charges but you may have a £360.00 finders fee to find for the new tenant, so you are down to £6040.00. Or you have a managing agent, and you are lucky enough that they don’t charge for finding new tenants but simply charge 10% +VAT per month. Property A incurs charges of £864.00 (leaving you at £5,536) while property B only incurs charges of £720.00 (leaving you with £5,280.)
The decision is getting a little harder but you may still think that you prefer property A despite the extra work between tenants. Have you considered the following? Council tax- due in vacant properties let’s call one month £80.00 and standing charges for utility providers let call one month £30.00. £110.00 off your total and more hassle for you to sort out.
Still thinking you want property A? The new tenant misses a rent instalment you evict and they leave the house in a bit of a state which takes the whole deposit to rectify. A higher turnover of tenants always increases the chance of getting a bad one, it’s a fact.
Is it property B for you now?
Obviously it’s all hypothetical but choosing property is more than just the figures you have to consider the human elements and try to keep their influence to a minimum. Look at the neighbours, do they look likely to cause you an issue? Look at the area, is it somewhere people settle or somewhere people stay for 6 months at a time? Look at the type of property, what type of tenants will it attract?
Working in broad brush strokes to select the right property in order to avoid a high turnover of tenants can be more important than the potential yield written down on your brochure. Make sure you consider all the factors before you make your next property investment.