Chasing The Yield

Posted on February 18th, 2021.

Since the early days of Buy-To-Let, yield has been the yardstick for Investors. As the Buy-To-Let sector continues to grow, I believe that yields will continue to be an important metric in the next five years.  

House price growth from 2020 to 2025 will likely be lower than it was from 2015 to 2020, meaning a much of an investor’s income over this period will come from rent rather than capital appreciation.  With the tapering out of tax relief on mortgage interest completing in the 2020/2021 tax year, lenders affordability tests are becoming far more stringent, given that a larger proportion of the rent will be taxed. This will make securing finance on lower yielding properties by higher-rate taxpayers much tougher in the years to come.

It is no secret that Landlords with investments in Northern Cities enjoy higher yields than their southern counterparts – nine in ten landlords in the North East achieve yields above 5%, compared with half of landlords in the South East and a third in London. See the graph below with the data form this research. As an Investor, there is still plenty you  can do to help maximise your yields.

Regional comparisons of yields between the North, London and the South East. Source: Ashmore Residential research.

Location

  • More expensive areas rarely offer the highest yields. Average yields in the most affluent areas averaged 4.6% in 2020, while in the least affluent areas they stood at an average of 8.0%. While there are other variables , in general, cheaper places offer higher returns.
  • The worst house on the best road tends not to be the best investment. It works for owner-occupiers, though Investors end up paying a premium when having to compete with this type of buyer. For the Investor, the average house on the average road will give the higher yield.
  • Avoid competing with owner-occupiers. Someone buying a home to live in will almost always pay more for a property than an Investor. Avoiding competition can mean buying a home which needs more work doing to it than most end users can take on. This will often be cheaper to buy and can be redeveloped to suit the needs of tenants for the local market.

Property

  • Flats offer the highest yields. Last year, in 83% of local authorities, flats offered higher average gross yields than any type of house, be it detached, semidetached or terraced.
  • Buy smaller units with 1 or 2 bedrooms. Nationally, average yields fall by 0.6% per additional bedroom. This means one and two-bedroom properties offer the highest returns, making the purchase of optimally sized homes a key driver of yields.
  • Know your customer:  Working out who will be the ideal tenant is will ensure you can offer them exactly the right sort of space. Three friends looking to share a flat or house are more likely to want three equal size bedrooms, while a family with young children is more likely to be happy with a large main bedroom and a couple of smaller bedrooms.
  • Buy tenanted. More than 20% of homes sold in London during 2020 had been owned by a landlord. Buying a property with a tenant in occupation means you will have an income generating asset from the day of completion.

If you would like to know more about Buy-To Let or have seen a deal that you are interested in, I’d be happy to express an opinion. You can email me [email protected] or call the office for a chat 020 8366 9777.

In next week’s article, I will share with you my thoughts on what the future holds for the Build-To Rent sector.