Buying a property at the right price brings buy-to-let landlords better gains in the long-term than those who focus on rental yields, according to new research – meaning that those who invest in off-plan property stand to achieve the best returns.
Estate agent Countrywide has analysed the performance of landlords across the country and found that returns can vary greatly within the same local authority, to a much larger degree than had been expected. The results imply that while there are major differences between a good landlord and a bad one, which can influence rental prices, those who made the most savvy investments in the first place performed significantly better than those who didn’t.
The research found that the top 10% of landlords in a given area who achieved the best yields made 4.1% more than the average level for that local authority, while the bottom 10% of landlords in terms of yield achieved 2.3% less than the local average. This amounted to a difference of £3,900 a year, which is a significant chunk of profit for a buy-to-let investor.
Update your yield calculation regularly
Investors often calculate their yields based on the price they originally paid for the property, but as the market changes and prices fluctuate, this method is often inaccurate. Buying agent Henry Pryor suggests that landlords should calculate their yield based on the most up-to-date valuation – which could lead some London landlords to realise that their once strong yields are now being outperformed by the returns that can be made in other areas such as the north of England.
The research revealed that the actual difference in the monthly rental income between the top-performing landlords and the worst-performing ones was just £20 a month – but the difference between what the two groups had paid for their properties was around £41,000.
The study said: “For the average landlord, the amount paid for a property has around three times the impact on their yield as the level of rent they are able to achieve.”
Johnny Morris, director of research at Countrywide, added: “We were surprised at how big the gap was between the average and best performers. There’s a feeling that being a landlord is easy and everyone can be good at it. But doing it well needs skill and the most effective landlords from an income perspective perform a lot better than the least effective ones.”
Buying off-plan makes a big difference
Buy-to-let investors and landlords stand to make the best returns from buying off-plan property in emerging areas of the country, such as Manchester, Birmingham, Preston and Leeds. The investment is made during the planning phase of the property development, meaning that the price paid is often significantly lower than the value of the investment once it is completed. Some units are even offered with a further 5% discount for early-bird investors, meaning greater gains in the long run due to capital appreciation.
While yields in these emerging regions are stronger than in the rest of the country, the house price gains forecast in such areas also support Countrywide’s view that investors looking for the best returns should focus on this aspect of the market.
