Buy-to-let has taken a bit of a bashing over the past two years with some landlords forced to sell up as profits dwindle – but it’s still possible to make a decent return.
Research from specialist buy-to-let mortgage broker Mortgages for Business shows landlords who let out property on a room-by-room basis last year raked in yields of 8.9 per cent on average.
This compares to a much lower, though still healthy, 5.6 per cent yield on ‘vanilla’ buy-to-lets where the whole property is let on one tenancy agreement.
Landlords who let out property per room last year raked in yields of 8.9 per cent
Multi-units, such as blocks of flats, generated yields of 8.1 per cent in 2017, compared to 8.3 per cent the year before.
Although all three property types saw yields fall last year compared to 2016, profit margins remain significant, with the firm putting this down to landlords buying lower cost properties and renting them out for more.
The research found that the average value of a vanilla buy-to-let property in 2017 was £305,283 – a 19 per cent decrease on the average in 2016 when it was £375,409.
Jeni Browne, of Mortgages for Business, said: ‘These results suggest that landlords are seeking lower value properties and, anecdotally, we hear that they have been looking further north for their acquisitions where prices are cheaper.
‘The benefits of this strategy include less stamp duty, future capital growth, and scope for rental increases which thus allow for slightly higher yields.’
The findings tally with separate research out last week revealing Nottingham and Liverpool as the best cities in the UK in which to be a landlord.
Another trend identified in the Mortgages for Business research showed the rising popularity of purchasing buy-to-lets through a limited company, likely down to more attractive tax breaks.
According to the firm, limited companies accounted for 49 per cent of all buy-to-let mortgage completions in the final three months of last year, compared to 31 per cent in Q4 2016.
Should you invest in an HMO?
Houses in multiple occupation – or HMOs – have become an increasingly popular option for landlords on the hunt for better returns after tax changes began to push up their costs.
As a result, profits across the board have dropped for buy-to-let investors, with traditional properties let on a single lease typically the worst hit.
Jeni Browne, of Mortgages for Business, said: ‘The attractiveness of HMOs as a buy-to-let investment has increased in recent years not only because of the higher yields on offer but because serious investors are keener to diversify their portfolios.
‘With more landlords vying for these properties, prices have been pushed up more quickly than the rents which, I would suggest, is one of the main reasons we are seeing their yields drop.
‘Although, I suspect that the granting of fewer new HMO licences is also having an impact.’
A HMO is where a landlord lets out several bedrooms in one property to tenants on separate assured shorthold tenancy agreements that allow shared use of common areas such as the kitchen and bathrooms.
This has several advantages for the landlord, including the fact that if one tenant moves out, they are still receiving rent from the others and can therefore keep up with their mortgage payments.
Another advantage is that it’s usually possible to charge more rent overall if there are multiple tenants than would be reasonable if the same property was let on a single lease to a family for instance.
HMOs are more complicated to look after than traditional buy-to-lets though, with many being bound by strict licensing rules. These vary by local authority, must be complied with and often involve extra costs.
Mortgage lenders are also stricter about handing out loans against HMOs.
The more mainstream lenders tend to avoid this type of lending but there are several smaller specialists such as Paragon, Shawbrook, Aldermore and Precise Mortgages that offer complex buy-to-let via a broker.
Browne added: ‘Savvy landlords like to have a good mix of properties. They like the consistency of vanilla buy-to-lets and the higher returns of more complex property types.
‘Although lower than previously, 8.9 per cent is still an excellent return for HMOs, not only when compared to vanilla buy-to-lets but also other, non-property assets.’
Nottingham and Liverpool are the best cities in the UK in which to be a landlord