There are approximately 8.5 million private tenants in the UK, while the proportion of renters to homeowners has doubled over the past 20 years. The expectation is that this figure will grow even more over the coming years as people continue to get onto the housing ladder even later in life – or not at all. While some of this is down to rising house prices compared to wages, the quality of life within the private rented sector has also seen vast improvements, and it is increasingly seen as a desirable lifestyle choice with more flexibility than owning a home, as well as less responsibility.The high demand in the private rented sector means that if you invest in the right property in a good location where tenants are likely to want to live, buy-to-let investors are still seeing huge success. Rental yields are particularly strong in places like Liverpool, Manchester, Birmingham and Leeds, as well as more peripheral, up-and-coming areas such as Preston, Bolton and Reading. Compared to the capital, many of these areas will also see the biggest house price rises over the coming years.
What Is Rental Yield?
Rental yield is the return a property investor is likely to achieve on a property through rent. It is a percentage figure, calculated by taking the yearly rental income of a property and dividing it by the total amount that has been invested in that property.
What Is A Good Rental Yield?
In our experience, a good rental yield for buy to let property is 7% or more. Anything under that and there might not be enough cash-flow in the property to cover running costs, mortgage payments and those unforeseen, expensive problems that sometimes crop up when you invest in property, unless your loan to value / mortgage is lower than the average and you have more cash flow in your property.
So when you are trying to find the best area in which to invest you need to be careful that you choose somewhere where the rental returns make sense.
Areas that have a fantastic rental demand or capital growth can be very tempting. Similarly below market value property can often look like a good deal. But, if the rental return is only, say 5%, then month-by-month your income is unlikely mortgages and baseline costs. Capital growth focused investors however with low gearing (mortgages) who focus on city centre locations may be the exception to this rule, where often they prioritise potential growth over everything else and yield is secondary.
Costs Your Rental Income Needs To Cover
In order to be sustainable over the long term your rental income needs to cover the running costs of the property and – you also need a contingency budget.
You need to expect the unexpected and be prepared for your costs to increase without warning.
For instance, interest rates on mortgages are at a historical low at the moment. When the cost of lending returns to more normal levels landlords left holding property with low rental yields (under say 5%) could find themselves in a lot of trouble.
And mortgage payments are only one cost in many. From your rental return, you will also need to cover management fees, buy-to-let landlord insurance and maintenance costs, all of which can fluctuate.
Costs can go down of course but you need to plan for when they inevitably go up. A house has a boiler and a roof, both of which can suddenly need replacing without warning and at significant expense.