How can landlords achieve top returns?

Achieving the highest rental income can be the best way to ensure a high return on your investment overall, and there are a number of ways for landlords to achieve the best results.

The private rental sector in the UK remains “a great place,” says Zoopla boss Richard Donnell, who has worked in the industry for 25 years. He accused some media of spreading “noise and misinformation” about the sector.

He also advises landlords to ignore property price growth and focus on cash flow – a sign that investors place more value on the rental income they can generate in the long term than on any appreciation they can ultimately achieve.

This long-term focus serves as a buffer for experienced investors to the ups and downs and changing trends in the property market, as the overall performance has remained positive over the past few decades. Demand in the private rental sector is expected to remain extremely high, meaning that the need for rental properties from landlords selling to let is unlikely to change, according to current forecasts.

Strong rental returns “an important indicator of health”

With a renewed focus on achieving high rental returns to maximise the value of an investment, many landlords and property investors are rethinking their strategies – and their portfolios – to ensure they get the most value from their properties.

This is particularly important in times of high interest rates and mortgage rates, as possible changes in rules and regulations, for example in energy efficiency, could result in changes for some landlords.

According to research by Paragon Bank, rental yields are currently at a ten-year high, reaching an average of 6.3 percent in the second quarter of this year. The last time rates exceeded this level was in the third quarter of 2012, when they reached 6.7 percent, while they remained at the same level in 2014.

The fact that they are currently so strong is “fantastic to see”, says Richard Rowntree, managing director of mortgages at Paragon, and rental yield is “an important indicator of the health of the lettings business”.

Who gets the best returns?

According to Paragon Landlords with the largest portfolios achieve the highest returns on average. Those who own 11 or more properties achieve an average rental yield of 6.9%. This could be because they are more experienced landlords who focus exclusively on high-yield properties and locations.

Landlords of limited liability companies also reported the highest average returns, again at 6.9%. Buying rental properties as part of a limited company has become increasingly popular in recent years as it can mitigate certain tax changes, such as the abolition of the mortgage interest tax relief, while also offering potential savings in other ways.

Another type of landlord that generates the highest rental income, according to Paragon, are those who own Houses with multiple occupants (HMOs). They report an average return of 7.2%, which is the highest of all real estate types.

HMOs are larger properties (three or more bedrooms) where each room is usually let to independent parties on a separate tenancy agreement. This means they often command higher rents and have fewer vacancies as only one room needs to be re-let when a tenant moves out, rather than the whole property being empty.

In terms of location, higher rental yields tend to be in the north. In a recent study by Zoopla, the North East was ranked as the highest yielding region in England with an average yield of 7.65%, closely followed by the North West at 6.66% and Yorkshire and the Humber at 6.38%.

These locations can also be particularly popular with property investors looking for a smaller investment volume, as property prices in these areas tend to be below the national average. Demand for rental properties is also high, particularly in the region’s major cities, meaning there is strong competition for rental properties.

If you are looking for your next property investment opportunity and generating high rental income is your priority, contact BuyAssociation today to learn more about some of our current and upcoming projects.