Why BTL Landlords Look To Rental Yields To Drive Profits

New research shows buy-to-let landlords are attaching more importance to higher rental yields and ways to future-proof property investments.

The average yield earned by a landlord who bought a property in 2020 was 6.2pc, but for those selling, it was 5.2pc, according to research by London estate agent Hamptons. Furthermore, 55pc of investor purchases achieved a gross yield of over 5pc last year, compared to 35pc of sellers.

There has been an increase in first-time landlords entering the buy-to-let sector which accounted for some of the purchases, while others were made by investors trading in lower-yielding properties for those with the potential to produce higher returns.

Average rental yields increased to 6pc in Q1 2021, additional research by Paragon Bank shows, the highest level in three years. Around 900 landlords were asked what rental yields they currently receive, taking into account rental income, as well as maintenance, mortgage and other costs associated with managing their portfolios.

Richard Rowntree, MD for mortgages at Paragon Bank, commented that as rental yields are a key metric for landlords, it’s heartening to see them capable of generating average yields of 6pc. The private rented sector, he said, has rebounded well from the Covid-19 pandemic, as shown by the fact that this represents a three-year high and occurs alongside continued high levels of tenant demand.

The sector has actually strengthened, he added, as a result of providing stable homes for tenants during the hardships of the past twelve months or so.

Strategy to focus on rental yield

One of the most popular investment strategies over the years has been to purchase a buy-to-let which provides capital appreciation in addition to returns from rental yields. Yet the tax and legislative changes introduced in recent years have caused problems for landlords with lower-yielding properties. This in turn has resulted in some investors offloading these properties and replacing them with ones which produce higher yields.

Property experts believe that prioritising rental yields and investing for the long term is a wiser investment strategy than concentrating on capital gains alone. This is even more so as speculation mounts over possible increases in capital gains tax in the future. Moreover, lenders are requiring landlords to meet increasingly stringent stress tests when applying for buy-to-let mortgages.

Although investors have traditionally bought higher-yielding properties in preference to the ones they sold, the divergence between the two has never been greater. Consequently, the added fiscal and regulatory obligations have rendered some lower-yielding properties unviable, although many of them will have increased in value since they were purchased. In effect, the current scenario is forcing investors to reappraise their portfolios and look for higher-yielding property.

Ways to future-proof property investments include carrying out regular maintenance and going green, which enhance the resale value and enable the landlord to benefit from favourable mortgage rates (for green properties). Investing in a new property which has the highest EPC ratings is also worthwhile. And due to the change to working from home and more flexible working becoming the norm, fast internet connectivity and dedicated office space will become increasingly important.

Choosing the right location

It makes sense for investors to choose locations with strong rental demand and projections of house price growth. For instance, many areas in the North of England offer lower entry prices and strong rental yield projections. Landlords who bought a rental property in the North East are achieving an average gross yield of 9.0pc, according to research from Hamptons, whereas in the North West, investors are buying properties with a yield of 7.4pc.

In every region in England and Wales last year, investors who bought properties achieved higher yields than those who sold. The greatest differential was in Yorkshire and the Humber, where landlords who sold a property had been earning an average gross yield of 5.9pc. Yet investors buying in this region are earning around 7.4pc now.

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