By 2016 it is estimated that a fifth of homes will be rented, requiring an extra 1.1 million rental properties above those currently available. While the continued increased demand is great news for both existing and new buy-to-let landlords, some would-be landlords are hesitant, believing they will struggle to obtain a buy-to-let mortgage and then face low yields once they have tenants in. However, with rents still on the up and better returns available than some other forms of financial investment, with some consideration it is easily possible for landlords to make a tidy profit from this venture.
Sources of profit
Profit can be made in a number of ways as a buy-to-let landlord, from obtaining a good deal on a property on purchase and making home improvements to add value, to rental returns and capital growth. For example, according to the estate agents Savills, rents rose 3% over the course of 2012 and are predicted to rise around 20% over the next five years.
Property size matters
Figures released by the letting agent Countrywide indicate that at present greatest rental yields can be obtained from smaller homes, with one bedroom properties offering 6.8% and those with two bedrooms 6.4%; this compares to 6.2% and 5.6% for homes with three and four bedrooms respectively. With greater year on year rent increases for smaller properties, these currently stand at 3.3% for those with one or two bedrooms, whilst houses with four or more bedrooms are only rising at 0.3%.
Choose the area carefully
The yield on your property is very much determined by its location. Earlier this year, research conducted by Home.co.uk, a property listing site, indicated that for landlords wishing to purchase a two bedroom property, Bootle in Merseyside offers the best return, providing an annual rental yield of 8.3%. This was followed by Plumstead at 7.9%, though properties here are almost three times the price. Yields offered in this area of Southeast London are far higher than more affluent areas such as Kensington, Chelsea and Mayfair, where yields can be as low as 2.4% and at best 3.3%. Other Boroughs of London performing well include Camberwell, Brentford, Newham and Dagenham, occupying the last four places within the top ten buy-to-let areas.
Consider the mortgage
Letting fees, repairs and potential periods where a rental property stands empty, can all eat into profits. While a mortgage is inevitable, ensuring you obtain one with the best rates will help to maximize your return, as will rechecking you have the best deal annually. Remortgaging is becoming popular with buy-to-let landlords, but be prepared to pay a deposit of 25% and that often a rent which is 30% higher than the mortgage is needed to allow this.
By Amy Millband *
* The writer is not a financial adviser and this article is written in a journalistic style to cover the facts and figures surrounding the property market. You should base your investment decisions on advice from a financial adviser not on opinions expressed here.