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UK Landlords Search for Smaller, Higher Yielding Properties

UK Landlords Search for Smaller, Higher Yielding Properties

UK Landlords Search for Smaller, Higher Yielding Properties

The buy-to-let sector shows an increasing interest in smaller properties, as landlords do what they can to maximise their return.

Given the sweeping changes to the buy-to-let sector over the past couple of years, it's hardly surprising many UK landlords are rethinking their investment strategies in a bid to maintain their profitability. The latest twist in the tale is the increasing interest in smaller properties, as landlords do what they can to maximise their return.

Not only are smaller properties cheaper to buy in the first instance, but they are also likely to have lower running costs. On top of this, they attract lower levels of stamp duty and have the potential to generate higher yields.

The importance of 'rental yield'

Rental yield is probably the most important metric for landlords investing in buy-to-let property as it gives an indication of the potential return on their investment. The rental yield can be measured by calculating the figure for yearly rent as a percentage of the capital value of the buy-to-let property. For example, a property valued at £200,000 that generates an annual rent of £13,000 would have a gross rental yield of 6.5 percent. This can then be used as a benchmark against alternative property investments.   

According to the latest buy-to-let index from a leading mortgage provider, landlords have been searching for lower value properties in an attempt to maximise their yields. An analysis of the mortgages arranged for the second quarter of 2017 has shown that all types of buy-to-let property purchased during the quarter had lower values than the overall average. 

Cheaper properties improve ROI

The report suggests that on the whole, smaller properties provide a better return on the landlord's investment. Houses of multiple occupancy (HMOs) and multi-unit properties continue to be the highest yielding properties, generating a return that averages just over 10 percent. Next come smaller properties, which typically generate a healthy yield of somewhere between 7.9 and 8.7 percent. 

The increasing interest in smaller, lower value properties can be evidenced by figures from a mortgage provider, which show there has been a significant drop in the average loan amount. For the first time since Q3 2015, the average loan size for Q2 2017 has fallen below £200,000. 

Landlords still seek to expand their portfolios

One consequence of landlords being increasingly selective about their purchases is that some have had to scale back their rate of expansion as they look for properties that can maximise their income with minimal investment. However, although the rate of expansion may have slowed, the enthusiasm landlords have to add to their portfolios remains high.

A 2017 landlord survey found that 89.5 percent of landlords plan to buy and expand their portfolios or stay the same in 2017. 17 percent of landlords with two or three properties and 20 percent of landlords with four or more properties are looking to expand this year.

Although being a successful landlord may have become just that little bit more difficult over the past few years, it's clear that a buy-to-let investment can still be profitable, as long as landlords make shrewd investments in the first instance.

How can we help?

At Martin & Co. Camberley, we use our unparalleled knowledge of the local property market and the most in-demand property types to help you make the right investment. For more information, please call 01276 691510 or email: camberley@martinco.com today.