With trends suggesting that 20% of all households in the UK will be renting a property by 2016, resulting in a requirement for an additional 1.1million rental homes, there is growing demand for new buy-to-let landlords to enter the market and existing landlords to expand their portfolios, says Dave McKnight of Martin & Co Derby.
It is estimated that there are 4.8 million privately rented homes in Britain, up from just 2.5 million in 2002. In London, private renting already accounts for 27% of all homes, some 900,000, and this high % will soon be reflected in other urban centres, such as Derby.
I believe some landlords and property investors are holding back from investing because of perceived low yields, shortage in buy-to-let mortgage availability and cynicism over profits.
However, rising rents and lower capital values are giving a much better return on cash than the banks. So in real terms, can a buy-to-let investment give you a tidy profit if you buy now?
The potential profits from buy-to-let investments can be misunderstood. Getting the right property, in the right location and at the right price with the right financial structure is fundamental to making a healthy profit from the start.
When it comes evaluating if a property was a good investment, you have to look at in the longer, rather than shorter term. Buy-to-let property bought at the peak in 2007 may not be showing a good return yet if it’s outside London. However a property bought in Derby in 2003, will normally be showing a healthy increase in capital value by now and
Then there is the cash flow side of the investment to consider for looking at returns. Rents have risen over recent years and interest rates are low providing the potential, depending on finance structure, for greater monthly returns.
Property has historically doubled in value every 7-10 years and has done now for over half a century, as it did from 2000 - 2010. During this period we experienced what was described as ‘the 2007 property crash’. In the last 10 years from 2002 - 2012, properties have seen around 50% increase in value across the UK. This could suggest that in the next 10 years we are going to see property values rise by at least 50% again if not more than double that figure. The 20 year rolling cycle of prices shows an increase in property annually averaging each year by 7% over the worst period since 1952 to 66% a year at best (1989-2009).
Profits from buy-to-let can be even more substantial, as the capital growth aspect is not the only way you can see a return. For example, profit can also be made at the point of purchase, through rental returns and by adding value to a property to name a few.
Rent increases over the past year have averaged 5.2%. with 20% rental growth forecast over the next five years, while research indicates that almost two thirds of tenants are expecting their rents to rise over the next year.
Yields currently range from 7.8% for the top performing 10% of properties to 4.4% for the bottom 10%, with the highest yields achieved for the lowest value properties typical of the Derby city centre.