Due to market conditions we have moved in to a new era. Find out how you can discover new hotspots that just may appear in your neighbourhood. I think its safe to say that it is unlikely that we will see a boom in prices like the last 10 years for most areas in the UK (apart for some pockets in Scotland, N.Ireland & parts of Northern England).
 
As you all know I am yield focused as I believe capital growth follows yield.  So in order to get capital growth you need to focus on the yield by getting a 10%+ and then healthy capital growth follows at around 100% in 3 to 5 years. 

So I am now focused on rental price growth.  I know this much:
 
1. Rental prices are independent of property prices.  There is no correalation between the two.  If property prices rise they have no effect on the amount of rent you can receive.
2. Rental prices rise with wage inflation.  So rental prices move up at wage inflation rates.  So you can say rents rise at roughly 3% a year.  The only way rents deviate from this calculation is when there is a shortage of properties in the area or a shortage of certain type of property in the area i.e. 4 bed homes.  Then you get above average rental price growth.
3. People are only willing to pay x% of their take home pay on housing costs before they downsize.  I reckon x = 50%.  So if your investment property is suited to a couple both with professional jobs who earn a net pay of £35,000 then the most they would be willing to pay would be £17,500 per year.  This equates to £1,458 in rent or £1350 in mortgage payments and £108 on repairs and insurance. 
 
So in order to get a potential 10% yield you need to look at whether rents could rise in that area so that the rent rises in order to give a 10% yield.
 
So you need to look for:
 
1. properties that yield close to 10%, so say 8% and look if there is going to be a likely shortage of a certain type of property AND
2. the rent at a 10% yield is less than 50% of the take home pay of your target tenant.
 
So for example if you know of 3 bed properties in private areas cost £100,000 that rent out at £8,000 per year (8% yield) are becoming more in demand due to a large employer moving to the area, and they could rent out at £10,000 per year because the take home pay of your target market is greater than £20,000 then you could get a 10% yield.
 
You have to keep an eye on these properties.  This is because you could a combination of:
 
1. The property price dropping from £100,000 to £90,000
2. The rental price increasing from £8000 p.a. to £9000 p.a.
 
Then bingo – your 10% yield!  It will be a £90,000 property renting out at £9000 p.a.  This property materialising due to property prices dropping by 10% (which could very well happen this year!) and rental prices increasing by 12.5% due to lack of supply (which could very well happen due to immigration is at its max!).
 
So be ALERT – a 10% yielder could be lurking just round the corner of where you live!
 
If you need inspiration to help you achieve your financial goals then sign up to my 151 Wake Up Calls For Financial Success by clicking on the link.

Ajay.

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Posted on: 26th February 2008 @ 11:54:00