What types of properties provide the best return on investment?

It has previously been suggested that investment properties in the UK could be found by acquiring a portfolio of three homes. This resulted in a study by Howsy which revealed that investors were getting the highest return on their investments with a rental yield of 4.3%. However, Howsy have recently looked at rental yields across the UK’s major cities as alternative and potentially better investments. However, this has changed thanks to a number of factors. Howsy’s report said that one-bed properties had reached 4.7% yields in May this year, making them the best buy-to-let prospects across the UK’s major cities.

Current status

Newcastle is the safest bet when it comes to investing in a one-bed buy-to-let, with the average yield landing at 7.9%. That’s closely followed by Dundee on 7.7%. The research also shows that while three-bed properties typically offer the lowest returns, they are still the most popular choice among landlords. Experts including estate agents in Preston Park say despite this, two and one bed homes are actually outperforming their larger counterparts where investment is concerned. A rental yield is the annual percentage of rental income that a landlord can expect to earn from a property, based on its current market value. It’s calculated by dividing the annual rent by the property’s value, then multiplying by 100. And with landlords now faced with this additional tax burden, experts are warning them to be extra savvy when it comes to choosing where to invest in order to maximise their yields.

Latest trends

The latest figures from HomeLet reveal a lot of changes are seen in traditional property trends across the sector and the latest seems to be the profitability of the three-bed buy-to-let. While still a good investment, on the whole, tenant demand is growing for one and two-bed homes that provide them with a space of their own. According to HomeLet, there are several reasons why this trend is emerging. The increasing number of tenants who have children or expect to start families in the future are looking for larger properties and more space and the tenant population is ageing with the average age of a tenant now aged 35 – many are families or couples who don’t want to share their space. The report from LendInvest also shows that average monthly yields for one and two-bed properties have surpassed those from three-bedroom homes for the first time, excluding those in Edinburgh where average yields for all property sizes have declined.

Some areas have seen yields grow by more than 20% over the last year, with Liverpool seeing a 20.5% rise taking its average yield to 6.3%. Manchester has seen a 19.8% rise, while Birmingham has seen a growth of 15.7%.

Why this change?

The growing demand for smaller properties has been linked to the increase in so-called ‘lifestyle renters’ who use renting as a stepping stone to homeownership and prefer their own space. The average rent on a three-bed property is £1,364, compared with £1,066 for a two-bed and £967 for a one bed. But while three-bed homes are most popular with families, more and more young people are also choosing to share with housemates rather than live alone. Meanwhile, the average price of a two-bed home is £154,292, while a one-bed home costs an average of £139,161. The NLA points out that this lower investment price point means that ‘landlords can not only afford to buy more properties but take advantage of economies of scale through managing multiple properties’.

How profitable is it?

The latest data from the Residential Property Index UK, which analyses the performance of the sector over the last three months, shows that one and two-bed homes are becoming more profitable for landlords than three-bed residences. The average yield for a three-bed home across the UK has fallen a full percentage point to 5.6%. This has been caused by an increase in both the cost of purchasing this type of property and the rent being charged. In contrast, yields on one and two-bed properties have seen a slight increase up to 6.5% and 6.3%. Although still lower than their larger counterparts, they have seen growth in recent years as tenant demand grows.

What does the future hold?

The coronavirus has already left a significant mark on the UK property market. We are seeing huge demand, which is driving average selling prices up. But we are also seeing a profound shift in people’s attitudes to shared accommodation and what they want from their homes, with demand for family-sized properties soaring. At the moment, however, having a home to yourself is more important than ever and many tenants are looking to move out of shared houses. This means that student house owners – and those with HMOs (houses in multiple occupancies) – could experience an increase in void periods.

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