Landlords who let out property on a room-by-room basis last year enjoyed yields of 8.9 per cent on average, research from specialist buy-to-let mortgage broker Mortgages for Business shows .
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.
Profit margins in the buy-to-let sector remain significant, and the firm attributes this to landlords buying lower cost properties and renting them out for more.
The research found that the average value of a 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.
The Mortgages for Business research also showed the rising popularity of purchasing buy-to-lets through a limited company.
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.
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.
Ms Browne 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.
“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.”
Source: Simple Landlords Insurance