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COMMENT
Statistics from two buy-to-let organisations highlight the crazy maths facing today's property investors. The numbers concern rental yield: the annual rental income a landlord receives expressed as a percentage of the value of the associated property. First up is Paragon (LSE: PAG), the listed buy-to-let mortgage company. It said yesterday that landlords had seen a 'positive start to the year', with rents, yields and prices 'all rising'. According to Paragon, the average rental yield across the country was 6.8% in January -- not bad you'd say when the best savings accounts pay just over 5%. Thankfully, the Association of Residential Letting Agents (ARLA) provides a more realistic -- and disturbing -- picture of rental yields. ARLA's report covering the fourth quarter of 2004 showed an outright cash purchase buy-to-letter obtaining an average gross rental yield of 5.2%, or 4.7% after voids. Fair enough, but less than a decent savings account. But here's where the sums get really stretched. According to ARLA, today's geared (25% deposit/75% mortgage) landlord has seen his rental yield after mortgage costs collapse to just 1.0%, or to negative 0.5% after mortgage costs and voids. In other words, many housing newcomers appear to be subsidising their tenants -- a somewhat ridiculous way to start a property career. But today's figures suggest anything but. They either seem too good to be true or paint the bizarre picture of negative monthly cash flows. Simply put, the buy-to-let arithmetic no longer adds up and prospective investors would be daft to enter the property market on these numbers.
But Paragon is talking gross rental yields. Oddly, it doesn't publish a net yield figure, which would include the expense of one of its own buy-to-let mortgages. Or for that matter, include other landlord expenses as well, such as management fees, insurance, repairs, maintenance and void periods. All these costs exist in reality and you've got to wonder why Paragon ignores them.
In fact, Paragon's figures generally appear somewhat aggressive, especially as the firm claims its own house price index jumped 25% in 2004 -- double that of the Halifax and Nationwide indices.
Years ago, experienced landlords could find tenants to pay off their mortgage, cover their other costs and have a surplus to put in the bank. Back then, the gross and net rental yield numbers made financial sense and compared well to ordinary savings accounts.