Landlords boost returns by following careful purchasing strategy

CalculatorTenants and owner occupiers seek different things when acquiring a home, understanding these differences allows canny landlords to tailor their rental properties to meet tenant requirements. This and other planning strategies can help boost landlord returns.

Countrywide plc, the UK’s largest letting agent, can reveal that the type of properties bought by landlords mean that many are able to boost their returns over and above average citied figures.

Most yields are implied, the product of dividing the average rent in an area by the average house price. In reality, however, landlords do not buy the average property. This is increasingly the case, particularly in more expensive areas.

Dividing the average rent by the average house price gives an implied yield of 5.3% in the UK. There is, however, a significant difference between the type and value of properties bought by landlords and owner occupiers. Taking this disparity into account by looking at what each individual landlord paid for their property means the average yield jumps to 6.2%. This means a landlord can expect to make an additional £2,500 a year.

With tenants living in a property for a shorter period compared to most owner occupiers, what the two groups are willing to pay for is often very different. In turn, this difference has a knock on effect on what landlords and those buying a property to live in themselves will look for, and pay a premium for. For example, in London just 2 in 9 rental properties has access to a garden compared to 6 in 9 homes sold for owner occupation.

Across the South of England in particular, where yields are lowest, landlords are becoming increasingly careful about the type of property they buy to boost their return. While dividing the average rent by the average house price implies an average yield of 4.2% in London, in reality the average landlord is achieving a yield in the region of 5.3%. This is a product of the type of property being let.

For the first time in two years, sitting and renewing tenants saw their rent rise at a faster rate than tenants moving into a property for the first time. A tenant moving into a new property in February 2015 paid on average 1.7% more than in the same month last year. In comparison, tenants who chose to remain in their home and renew their contract saw their rent increase by 1.9%. With newly agreed lets a solid leading indicator of renewed tenancies, it suggests that we might expect to see rents growing at a slower rate over the next couple of months.