Prospects for property investors look brighter following signs that house price falls are easing in some areas, while rents are stabilising after months of sharp decreases.
Agents are reporting an increase in the number of investors looking to add to their property portfolios or buy a second home. With returns from cash still close to zero per cent, even modest returns on buy-to-let property are attracting investors seeking higher income.
Rental yields have risen recently as property values have fallen more sharply than rents.
In the second quarter of this year, the gross return on houses increased to 5.1 per cent, from 4.8 per cent in the previous quarter, according to the Association of Residential Letting Agents (Arla). Meanwhile, the yield for flats rose from 4.9 per cent to 5 per cent.
Hometrack, the housing analyst, believes gross yields could hit 7 per cent next year on cheaper properties that are still likely to fall in value.
But while these figures look more enticing than bank deposit rates, potential landlords need to be alert to the costs involved in letting property, which can erode a sizeable proportion of their profit. Agent fees, maintenance costs, insurance premiums and income tax could erode at least 20 per cent of the monthly rent.
Smartlandlord, which helps landlords let properties privately, says that even without a letting agent, costs can eat up around 1-1.5 percentage points of the gross yield. And this presumes the property is fully let – void periods can be disastrous for landlords relying on rent for income.
Many landlords have had to reduce rents in recent months, sometimes by 10 or even 20 per cent, as falling house prices have deterred homeowners from selling and brought a glut of properties on to the rental market.
However, there are early signs that the market is now improving. Last month was the first since August in which rents did not show a month-on-month decline, according to Findaproperty.com, the property website. The rate at which supply increased also slowed, with the total number of properties available to rent up by 2.7 per cent month-on-month in May.
Letting agents say fewer tenants are demanding rent cuts, while much of the property that has flooded the market in the past six months is now occupied. Some “accidental” landlords – who only let out their properties as they could not sell them – are also now finding buyers.
“Last year, there was a big increase in supply as people couldn’t sell their properties and there were fewer corporate tenants in the market,” says Jane Ingram, head of lettings at Savills. “We are no longer seeing tenants getting the reductions they would have enjoyed last year and the first quarter of this year.”
Parts of the market are recovering more quickly than others. Hamptons, another agent, says good quality one and two-bedroom flats in central London are letting quite quickly.
| How to get the best yield |
Gross rental yields of 5 per cent or more may look attractive to income-seeking investors but, once letting costs are stripped out, they look decidedly more moderate. Richard Donnell at Hometrack says landlords’ net yields are typically 1-3 percentage points lower. The biggest expense for landlords is agent fees. These are typically 10-14 per cent of the rent, or closer to 20 per cent if the landlord wants to hand over full control of the day-to-day management. Landlords who want to extract as much income as possible from a rental property could consider managing it themselves. This will involve dealing with any problems that occur – defunct boilers, for example – and collecting the rent themselves. But before landlords decide whether to use a management service or not, they must make sure they buy the right property at the right price. The Association of Residential Letting Agents (Arla) advises investors to research which properties are in demand and look at existing rents. Yields on one and two-bedroom flats tend to be higher than those on family houses. However, bigger houses may have the potential for better price growth. To keep their initial outlay down, investors could look for repossessed properties, which may sell at a discount, or homes that need refurbishments. Those keen to buy bigger properties could boost their yields by renting them out to a number of individuals – students, for example, rather than a family – although they would have to meet specific “houses in multiple occupation” rules. Landlords who use an agent to find tenants should make sure that agent is licensed. Those who want to let privately can pay a one-off fee to a company such as Smartlandlord, which can market the property and provide referencing and insurance services. In addition to agents’ fees, other costs can eat into the rent. Landlords are responsible for the ground rent on leasehold properties, service charges on flats and buildings insurance. They can take further insurance cover to safeguard against emergency repair costs and unpaid rent. Landlords also need to pay for an energy performance certificate and gas safety checks before they can let a property. |
