Buying
1. Squeeze up the yield
All investors aim to achieve the highest yield they possibly can. Yet, typically, it’s the price they pay for their property rather than the rent it commands which makes the largest diff erence to their returns. For example, landlords achieving yields that are 50% above the local authority median pay an average of 40% less for their property while achieving rents that are 8% above average.
Price is also the main element behind lowyielding properties, but for very diff erent reasons. Perhaps counter-intuitively, the lowest yielding homes still achieve higher than average rents. These tend to be homes where buyers have paid a large premium and are typically bigger detached or semi-detached family homes. While they achieve higher than average rents, they form a lower-than-average proportion of the purchase price, meaning yields are low.
2. Consider corporate ownership
We estimate that around half of investor purchases last year were put into a limited company structure. The growing preference for company ownership means that around two-thirds of limited buy-to-let companies have been set up since 2016, the year when the then Chancellor George Osborne announced that mortgage interest would soon no longer be taxdeductible for landlords holding investment property in their personal name.
There are now over 270,000 buy-to-let companies in operation, more than ever before. However, despite a corporate structure being advantageous for many, particularly for higher-rate taxpayers, it’s likely the number of new incorporations is at or close to its peak. Many of those investors preferring the corporate structure already have it set up, with new purchases going into an existing company, while for lower-rate taxpayers the benefi ts of incorporation are far more marginal.
3. Measuring portfolio performance
Tracking and measuring the performance of a single property or even a whole portfolio is central to maximising returns. This typically means investors buy higher-yielding homes and sell those achieving lower yields – last year, the average home bought by an investor achieved a yield that was 1.1% higher than the average home being sold off.
This yield gap has been compounded by a sell-off of larger, lower-yielding homes, partly due to the tapering of mortgage tax relief. These have been replaced by the purchase of smaller properties, which tend to be higher yielding. In practice, this means that two detached homes are sold for each one bought.
4. Don’t forget new EPC regulations
Energy-saving regulations introduced in 2018 ban most homes rated F and G from being let out and there are proposals to extend this ban from 2025 by reducing the minimum EPC rating to C. This means around 45% of today’s rental homes will need to undergo energy improvements, with a cap on costs of £10,000 to £15,000 expected.
While costly for landlords, upgrading a home from an E rating to a C will save tenants an average of £725 a year, although going from a D to a C will save around half of this amount. The drive for sustainability combined with rising household energy bills will likely see tenants put greater emphasis on energy efficiency.
Renting
5. Yield depends on the tenant
Working out who the optimal tenant is will ensure that you can offer them the right sort of space. For example, three friends in their twenties looking for a house to share are more likely to want three double bedrooms, and potentially pay a premium for them. Meanwhile, a family with young children may be happy with a double and a couple of single bedrooms and will likely place less value on three doubles.
6. The pandemic has changed what tenants want – and hence returns
Over the last year or so, larger homes have seen the strongest rental growth as tenants have sought extra space. While smaller properties still tend to earn bigger yields, since Covid, gross yields on flats have fallen by 0.3% on average to 5.5%, while yields on detached properties have seen the biggest increases of +0.2%, meaning they now stand at 4.9%. However, as rental growth in cities catches up this year, we could see this trend reverse once again.
7. Don’t be fooled by gross yield figures
Houses in multiple occupation (HMOs) and student lets are widely known to offer stronger yields. But when it comes to evaluating the profitability of these investments, it’s important to factor in the many additional costs that landlords must often pay – such as council tax, water, gas & electricity, council licencing fees and furniture. All these costs can soon turn what looked on paper like a promising gross yield into a fairly average net yield. The same can be true for leasehold flats, which often command a service charge and annual ground rent, which can eat into profits.
8. Threat of build-to-rent
In its early stages, build-to-rent was predominantly London focused. However, 2021 marked the point where more new build-to-rent homes were advertised outside the capital than within. And this adjustment is likely to continue over the next few years.
In city centre blocks, the additional services mean build-to-rent operators currently achieve 12% more rent than an average individual landlord who has bought into a similar block. Build-to-rent is also growing in the suburbs with a shift towards singlefamily homes – this growth is likely to provide more competition to small-time landlords. Further out of cities, with no additional services, the build-to-rent premium shrinks to 7%, meaning rents are likely to be closer to those being charged by individual landlords.
