BUY-TO-LET INVESTMENTS YIELD JUST 3.4% DESPITE RECENT GROWTH
Tuesday October 31, 2023
Recent research indicates that the net rental yields for buy-to-let properties have grown, yet they remain at a modest 3.4% after accounting for the costs associated with property maintenance. The study initially assessed the gross rental yield of the average buy-to-let property, comparing it to the net yield secured after annual operational expenses.
Currently, investing in the average buy-to-let property in the UK involves an upfront cost of £289,824. These properties typically command a monthly rent of £1,276, resulting in an annual income of £15,312 and a gross rental yield of 5.3%. The good news is that this gross rental yield has risen over the past year, up from 4.8% in the previous 12 months.
However, once the costs of maintaining a buy-to-let property are considered, the net yield is significantly reduced. These costs encompass letting agent fees (£1,837), general maintenance costs (£2,898), the expense of an annual gas safety certificate (£80), an electrical safety report certificate (£225), and landlord insurance (£427). In total, these supplementary costs amount to £5,468 for the average UK landlord, reducing their projected annual income to just £9,844.
Consequently, the net yield secured on the average buy-to-let property now stands at just 3.4%. It’s essential to note that this figure has improved from 3% over the past year. Nevertheless, it’s worth considering that these ongoing costs do not include the average expense of repaying a buy-to-let mortgage, which currently averages £1,201 annually.
Furthermore, additional research has highlighted the impact of inflation on buy-to-let profitability, particularly regarding the cost of furnishing rental properties. Over the past year, the prices of essential furniture items have increased across the board. Electric cookers, in particular, saw the largest price hike, with a 12.3% increase. Curtains witnessed an 8.8% cost increase, dishwashers are up 6.7%, armchairs now cost 5.7% more than a year ago, and washing machines (+5.2%) and wardrobes (+4.8%) also experienced significant price hikes.
These findings suggest that landlords are facing increased financial pressures, which could lead to a surge in the sale of buy-to-let properties. This situation, coupled with higher mortgage costs and regulatory changes, could exert further downward pressure on house prices. Notably, many smaller landlords are struggling to sustain their business models, and they may consider selling off properties due to the financial strain.
In the longer term, the balance of supply and demand in the housing market may be disrupted by landlords selling unprofitable properties, potentially impacting overall house prices. As the private rented sector’s influence on the market has grown in the past decade, the financial stress faced by landlords and their potential disposals could have wider repercussions.
In addition to financial pressures, regulatory factors such as tax changes and upcoming tenancy reforms in England are further deterring investment in the buy-to-let sector. While professional landlords are in a better position to weather these challenges, smaller landlords are experiencing heightened vulnerabilities.
Furthermore, the study suggests that landlords’ ability to pass on increased costs to tenants may be limited, as many renters are already struggling to afford their rental payments. This situation could further strain the buy-to-let sector in the coming months.
In conclusion, the landscape for buy-to-let investments is becoming increasingly challenging, with rising costs and regulatory changes impacting profitability. Landlords, especially smaller ones, are facing significant financial pressure, and their potential sales of properties could disrupt the housing market. It’s crucial for policymakers to consider the implications of these challenges on housing affordability and tenant rights.