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How are buy-to-let landlords achieving higher rental yields?


Buy-to-let Landlords, Property Investment Guides
New research shows buy-to-let landlords are achieving higher rental yields. Here’s why landlords are focusing more on yields and ways to future-proof property investments.

According to research by London estate agency Hamptons, the average yield earned by a landlord who bought a property in 2020 was 6.2%. For landlords who were selling, it was 5.2% Additionally, 55% of investor purchases achieved a gross yield over 5% last year, while only 35% of sellers did.

Some of these purchases were by new investors as there had been a rise in first-time landlords entering the buy-to-let sector. Others were by existing landlords trading in lower-yielding properties for those with the potential to earn higher returns.

Additional research from Paragon Bank reveals average rental yields increased to 6% in Q1 2021. This is the highest level in three years. As part of a survey of nearly 900 landlords, they were asked what rental yield they are currently achieving. Landlords were asked to take into account rental income and maintenance, mortgage and other costs associated with running their portfolio.

Richard Rowntree, managing director for mortgages at Paragon Bank, comments: “Rental yields are a key measure for landlords so it’s encouraging to see them indicate being able to generate average yields of 6.0%.

“The fact that this is a 3-year high and is being reported alongside continued high levels of tenant demand suggests that the private rented sector has bounced back well from the Covid-19 pandemic and is actually stronger as a result of providing stable homes for tenants during the challenges of the past year or so.”

Focusing on rental yields

One of the most popular investment methods is to purchase a buy-to-let where you reap returns through rental yields over time, in addition to capital appreciation. The legislative and tax changes introduced in recent years have put pressure on buy-to-let landlords with lower-yielding properties. This has led to some landlords selling off these properties and purchasing the types of properties that typically offer stronger yields.

Focusing on rental yields and investing for the long term is typically a better investment strategy than only focusing on capital gains. This is especially the case with speculation over capital gains tax rises in the future. Additionally, lenders have required landlords to meet increasingly stringent stress tests when getting buy-to-let mortgages.

Landlords have always bought higher-yielding properties than the ones they sold. However, the gap between these two has never been wider. The added tax and regulatory obligations have made some lower-yielding properties unviable. However, many of these properties would have gone up in value since they were purchased. The current landscape has put pressure on investors to optimise their portfolios and find higher-yielding properties.

Providing and adding value

Many landlords have changed how they operate with the recent regulatory and tax changes. Nowadays, many will undertake work to their property in hopes to achieve the highest value of rent possible. This could also add value when selling the property later on.

Going green can add extra selling points when attracting tenants. Landlords can also benefit from favourable mortgage rates for green properties, which can allow you to making savings on mortgage repayments. Additionally, greener properties will likely have better resale value moving forward. Investing in a new property, which tend to have the highest EPC ratings, or making green improvements to your property can be a good way to future-proof your investment.

Adapting to modern life can also allow landlords to future-proof their property investments. People’s work-life balances are drastically changing as working from home and more flexible working is becoming the norm. Because of this, fast internet connectivity and dedicated office space will be especially important moving forward. Adapting to the changing trends of modern life can help you improve your property investment.

Choosing investable locations

It’s important for landlords to choose investable locations, ideally with strong rental demand and house price growth projections. Many areas in the north of England are providing lower entry prices with strong rental yield projections.

According to research from Hamptons, landlords purchasing a rental property in the north-east are seeing an average gross yield of 9.%. In the north-west, landlords are purchasing properties with a yield of 7.4% on average.

Every region in England and Wales saw landlords who bought properties achieve higher yields than those who sold last year. The most significant differential was in the north of England. In Yorkshire and the Humber, the average landlord who sold a property had been earning a gross yield of 5.9%. Landlords purchasing a property in that region are achieving approximately a 7.4% yield on average.

Choosing the right property is the first step to maximising your chances of earning strong rental yields. Browse a selection of our investment options, and sign up for free to get full access and advice.

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