Average rental yields hit a ten-year high in the summer of 2024, fuelled by massive demand from tenants and an ever more acute shortage of homes.
That data comes from a survey by Paragon Banking of 800 landlords that also revealed how 85% of them were making a monthly profit.
It's true that part of the supply problem is down to some disillusioned landlords selling up, but a new generation of investors is proving that with the right approach, buy-to-let is still a sound business.
But before you start snapping up homes to rent out, it’s wise to ask a few essential questions like:
- How has buy-to-let changed?
- Who are the new generation of landlords?
- What’s making yields so high again?
- Why will there never be enough homes?
- Is becoming a landlord right for you?
Armed with the answers, you'll have all you need to decide if becoming a landlord feels right for you, and whether it's time to begin your journey.
HOW HAS BUY-TO-LET CHANGED?
All business models have to adapt to changing conditions and the passage of time, and being a landlord is certainly a different proposition today than 20 years ago for the following reasons:
- New housing standards mean landlords are legally obliged to maintain their rental homes to a higher level to provide comfortable and energy-efficient places to live.
- Changing tax rules, tighter lending criteria and higher interest rates have disrupted the business model of landlords who relied on super-cheap 95% mortgages with 100% interest relief.
- Extra legislation around tenancy procedures, along with increased fines and penalties for breaking the rules, means owning a rental property is held to a stricter and higher standard.
In short, buy-to-let is no longer a place for draughty and poorly maintained homes, nor highly leveraged landlords who need large tax breaks. But that doesn't mean you can't still build a brilliant business.
WHO ARE THE NEW GENERATION OF LANDLORDS?
The profile of landlords is changing, and research from accountancy group UKY Hacker Young shows that more than 3,000 are now under 21. Inevitably, this comes with a different perspective and philosophy.
- Millennial and Gen Z landlords are more savvy from the outset, with resources that simply didn’t exist before, like TikTok and Instagram channels by successful investors showing how they do it.
- They feel that all the increased legislation is a good thing to regulate the sector and improve housing standards for tenants, having been renters themselves.
- New landlords set up companies to buy property from the outset (and in record numbers in 2023) for greater tax efficiencies, like claiming back all of the mortgage interest payments.
To see the new generation at work, a good start would be to follow landlord influencers like James Coupland and Ryan Cresswell with a view to repeating their success, whatever your age.
WHAT’S MAKING YIELDS SO HIGH AGAIN?
With the average monthly rent in the UK now standing at £1,331, annual yields (the sales value divided by the yearly rent) are now 6.3%, following an 8.4% average increase in rents over the last year.
It's their highest level in a decade, and there's no sign of the trend reversing for a number of reasons:
- The squeeze on supply has pushed rents up and up and up, and that pressure is only mounting as some landlords decide to exit the rental market.
- As higher energy efficiency becomes a legal requirement, landlords selling up to avoid the expense provide an opportunity to buy homes at a lower price to upgrade over time.
- The lack of choice is causing more tenants to stay where they are, making it easier to review the rent for existing tenancies without changeovers, voids, or referencing costs.
Although yields do fluctuate, you’ll almost certainly find that once you've bought a property, the annual yield against the purchase price increases every year. So, the returns get better the longer you own it.
WHY WILL THERE NEVER BE ENOUGH HOMES?
Rental demand is more than double pre-pandemic levels, while the supply of homes has gone into reverse. But this isn't a new story. It's the same old show that's been running for years.
- Recent analysis from the Financial Times estimates the UK needs 421,000 new homes per year, and possibly 529,000 if current levels of migration continue.
- Even if Labour reaches its ambitious target of 1.5 million homes during this parliament, and we hope they do, there will still be a chronic housing shortage.
- Successive governments from all sides of the political spectrum have promised to tackle housing in every election campaign, and the problem has always eluded them.
So even in the best-case scenario and with the best will in the world, the shortage of homes and extreme demand is here to stay for quite some time, and landlords are an essential part of the solution.
IS BEING A LANDLORD RIGHT FOR YOU?
The people who enjoy being a landlord the most care about more than money. Pursuing a passion, finding property to renovate, and creating wonderful homes gives them a real sense of accomplishment.
That said, financial success adds to the satisfaction of running any business, and the main drivers for getting into buy-to-let today are:
- Taking control over pension planning with a portfolio of homes rising in value over decades and continuing to do so long after mortgages are paid off.
- A legacy to pass on to family using new structures of company ownership for more efficient tax and inheritance planning.
- Long-term financial security, flexibility and independence with safe assets that can be refinanced or upgraded to keep your business at peak performance, or sold off whenever you choose.
Like any profession, being a landlord isn’t for everyone, but if any of these form part of your plans for the future, it could be worth exploring buy-to-let in more detail.
Are you curious about buying to let?
Then let's talk about whether it’s right for you, and how we help landlords in Birmingham to build a great business and plan for a future of financial freedom.
Call us on 03338 802 602 or message us at enquire@three2six.co.uk for a no-strings chat with our team.
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