22/07/2018

Monthly rental yields are growing for buy-to-let investors, despite the introduction of new regulations. Despite the growth, and despite landlord confidence in their own investments increasing, most respondents of the study released by BM Solutions and the BDRC Landlords Panel have not shown any increase in confidence in their rental yield prospects. The survey shows that landlord optimism is at an 18-month high, coinciding with the highest rental yield since the end of 2014.

Landlord Sentiment

The survey by BM Solutions and BDRC asks landlords about the current state of their investment and the market, in general, as well as asking for their feelings about future market movements. The report is compiled and released quarterly. This quarter’s survey would have been completed before the interest rate increase, which could have impacted results, but sentiment was definitely positive.

Expectations

There have been a number of regulatory changes to affect the real estate and rental markets in recent months. The opportunity to offset mortgage interest payments against rental income is being phased out and further tax changes means that a lot of landlords and property owners have found themselves in a higher tax bracket than previously. The result of the changes has been a major slowing in the buy-to-let industry.

As a result of these changes and continued pessimism surrounding the industry, the number of new buy-to-let mortgages has fallen. In May 2018, there were less than 5,500 new mortgages for landlords, compared to around 6,500 a year earlier. Despite a reduction in the number of new market entrants, however, those that have retained their property portfolios are feeling more positive.

Market Sentiment

Overall, 44% of landlords said that they are feeling positive or very positive about the outlook of the rental market. Although this is less than half, it represents an increase of 8% from the same time the year before. 15% of respondents said that they were confident in the state of the UK’s economic market, which represents a 3% growth from the year before, and 32% felt good or very good about their potential capital gains for the year ahead – another 3% annual increase.

Unfortunately, only 49% said that they felt positive about the outlook of their rental yield. This means that confidence has remained steady in this area.

Rental Yields

Approximately half of the landlords that responded to the survey feel confident in their rental yields for the coming quarter, and with good reason. Although the industry is facing a steady stream of regulatory changes, and the number of first time mortgages has increased, the average rental yield is currently 6.2%, which is the highest it has been since the final quarter of 2014.

Gross Rental Yield

Rental yield is used as a measure of profitability that a property offers the landlord. The higher the yield, the more profit potential there is, and it is a figure that you will need when applying for a mortgage, or to quickly determine whether an investment is likely to give a profit. It doesn’t take into account capital gains, but a net rental yield does incorporate costs like mortgage repayments and management fees, to give you the net returns that you can expect.

Gross rental yield is calculated by taking the annual rent, dividing this by the property value, and then multiplying by 100. So, if you have a property that you paid £150,000 for, rent it out for £700 a month, then the gross yield would be:

(£8,400/£150,000) * 100 = 5.6%

Net Rental Yields

Gross yield only tells part of the story. For example, most landlords have to take out a mortgage to pay for a portion of the purchase. Other costs to take into account include management fees, insurance premiums, and the cost of performing maintenance and repairs to the property. These costs should be subtracted from the annual rent returns and applied to the calculation above.

If you have £8,400 annual rent returns, and determine that costs equal around £2,000 a year, this means that your net rental yield calculation would be:

£8,400 – £2,000 = £6,400

(£6,400/£150,000) * 100 = 4.3%

Costs can greatly reduce your rental yield, but you need to ensure that you get an accurate and reliable figure, to determine your potential profits.

If you have to pay renovation costs on a new property, you can add the value of these costs to the purchase price of the property for your calculations, so using the example above and assuming that you added a new kitchen and made some other improvements for a total of £15,000 investment, the calculation would be:

(£6,400/£165,000) * 100 = 3.9%

Improving Rental Yields With PDF Estates Ltd

There are ways to improve your rental yield. You can increase rent, although you need to ensure that you abide by your tenancy agreement, or you can reduce costs. PDF Estates Ltd prides itself on providing reliable property management services at highly competitive rates. We even offer 3 free months’ full management services for new landlords, and all our costs are transparent, which means that you can easily calculate your net rental yield, while letting a professional team deal with all aspects of managing your property.

Our team can help source tenants, collect rent, and we can manage your entire portfolio. We have a network of trusted and reliable suppliers, including cleaning and maintenance contractors. We can help determine a competitive rent, and keep your annual costs down, thereby maximising returns and rental yield.

Call PDF Estates Ltd on 020 3815 7952 or email info@pdfestates.com and speak to one of our team about the property management and letting services we offer to clients.