For as long as the buy-to-let sector has existed, yields have been one of the most important metrics for landlords. However, over the next five years, we believe they will become even more crucial for two reasons.
First, it is likely that price growth from 2020 to 2025 will be lower than it was from 2015 to 2020, meaning a larger proportion of an investor’s income over this period will come from rent rather than capital appreciation. And second, with the tapering out of tax relief on mortgage interest completing in the 2020/2021 tax year, lenders are applying increasingly stringent affordability tests given that a larger proportion of the rent will be taxed. This will make securing finance on loweryielding properties by higher-rate taxpayers much tougher in the years to come.
It is no secret that northern landlords enjoy higher yields than their southern counterparts – nine in ten landlords in the North East achieve yields above 5%, compared with half of landlords in the South East and a third in London. However, there is plenty landlords can do to maximise their yield while still buying locally.
- More affluent areas rarely offer the highest yields. Average yields in the 10% most affluent areas averaged 4.6% in 2020, while in the 10% least affluent areas they stood at 8.0%. While there are of course other considerations, in general, cheaper places offer higher returns.
- The worst house on the best road tends not to be the best investment. While received wisdom suggests owner-occupiers should buy the worst house on the best road they can afford, this means investors end up paying a premium, too. For them, the average house on the average road is likely to net a far higher yield.
- Avoid competing with owner-occupiers. Someone buying a home to live in will almost always pay more for a property than an investor. Avoiding competition can mean buying a home which needs more work doing to it than most owneroccupiers want to take on. This will often be cheaper to buy and also allows for personalisation and reconfiguration to the tenants’ needs.
- Flats offer higher yields than houses. Last year, in 83% of local authorities, flats offered higher average gross yields than any type of house, be it detached, semidetached or terraced. In the remaining 17% of England and Wales, predominantly towns in the Midlands and Northern England, terraced houses offer the highest returns.
- Buy smaller with fewer bedrooms. Nationally, average yields fall by 0.6% per additional bedroom. This means oneand two-bed properties offer the highest returns. Yields also drop by 0.1% for each 10 sq ft of space added, making the purchase of optimally-sized homes a key driver of yields.
- Understand your target market. Working out who the optimal tenant is will ensure you can offer them exactly the right sort of space. Three friends looking for a house to rent are more likely to want three double bedrooms, while a family with young children is more likely to be happy with a double and a couple of single bedrooms.
- Buy tenanted. More than one in five homes sold in London during 2020 had been owned by a landlord. Purchasing a property with a sitting tenant can mean avoiding a void period and receiving rent from the day of completion.