Monday, July 23, 2012
Figures just released show that rental yields on
buy-to-let properties have held their own over the past three years
and have even increased to record levels on certain types of
property, despite the economic downturn.
Chris Baguley, Director of Auction Finance Limited, said:
"According to the Association of Residential Letting Agents (ARLA),
the average rental yield on houses in quarter one of 2009 was 5.1%.
This has remained constant over the past three years, while rental
yields on flats have increased from 5% to 5.2%.
"The most significant figure, though, is that average
rental yields on 'houses of multiple occupancy' (HMOs) have reached
an all-time high of 10.7 per cent, especially in cities with large
student populations. Of course, this figure can be enhanced even
further by buying a property at auction.
"Things are definitely heading in the right direction. The
proof is there for all to see that there are financial benefits to
be had from investing in buy to let property.
"With property prices and interest rates still low and
rents projected to increase over the next twelve months, bricks and
mortar provide an attractive alternative to poorly performing
Although property presents a good long term gain, most
investors still expect it to deliver a regular income.
Baguley has the following advice to help would-be property
investors calculate the likely return on a property investment and
assess the attraction of entering the buy-to-let market:
1) Make sure you
Many financial definitions exist, some confusing. The only
one you really need to get your head around is 'net
This is the annual rental income you expect from a
property minus the annual outgoings such as insurance, repairs and
agency fees divided by the purchase price. Here's a simple example
Annual rental income (12 x £600) = £7,200
Minus annual running costs (£1,200) = £6,000
Divided by purchase price (£100,000) = 6% net yield
2) Be realistic with
It is far better to err on the side of caution than
over-inflate your likely returns. So, don't forget to take into
account things like empty periods.
Using a simple spreadsheet, look at the net yield you can
expect based on full 12 months occupancy, right down to just six
3) Benchmark your
Yield levels vary regionally and by the type of property.
Stay abreast of changes in the market.
ARLA and the Essential Information Group (EIG) both
produce quarterly statistics which are worth keeping an eye
4) Buy at
Figures from EIG show that properties bought at auction
deliver significantly higher yields (8.52% for terraced houses and
8.54% for flats).
This is because the prices of properties up for auction
are generally lower than the prices set by agents and because less
fees are incurred.
If you're new to auctions, attend a couple to get a feel
for how they work. And remember, if you are tempted by a bargain
but haven't got your funding in place, Auction Finance Limited will
be able to help you there and then.
5) Set a sensible
Do your research and get a feel for the going rate for
similar properties in an area.
Remember, over-pricing and under-pricing can be equally
damaging to your investment plans. Make sure you set the rent at a
sensible level to attract tenants and hit your yield
6) Bigger isn't
All the evidence shows that smaller properties deliver
higher yields. If you have a budget of £100,000, far better you buy
two smaller properties than one big one.
7) Go out of
Don't be wooed by the bright city lights. It is often
better to buy a property outside the city centre where purchase
prices are lower but demand remains high.
Again, do your research and know the area you are
considering. A couple of streets can make a huge difference to the
appeal of a property and the rental you can expect. Take into
consideration things like proximity to bus routes and
8) Weigh up the
benefits of improvements
Give careful consideration to the question of improvements
to the property.
Will the cost lead to higher rental income? How long will
it take you to recoup the investment? It's all about getting the
balance right. If you do decide to make improvements, set a
realistic budget and stick to it (again, your spreadsheet can show
you all the permutations).