Along with a prolonged period of suppressed yields for many landlords in the south, the Bank of England rate rise has inspired some to turn their gaze northwards, where the potential to earn a good return has consistently proved more successful in recent years.
Indeed, according to the latest figures in our Rental Report, the East Midlands boasts some of the highest areas of rental growth in the whole of the UK, with Leicester taking the regional top spot for the best annual rental growth at 3.23%.
In comparison, in London, the recent small increase in average rental growth has done little to remedy the generally downward trend, as almost three quarters of all boroughs in the city experience falls.
Outside London, the situation is much the same, with the South East of England scraping the bottom of the rental tables. Taking 176th place out of a possible 186, annual rental change in Windsor & Maidenhead comes in at -1.13%, the lowest in England (outside London).
Not only yield
To base decisions simply on yield is tempting, particularly when growth is on the up.
However, it is important to recognise that yield is only one factor to consider when investing in buy-to-let.
Ultimately, building a property portfolio is a business and, as with any business, chasing yield in isolation is not a sustainable model.
In addition, it is equally important for landlords to consider the prospects for demographic and economic changes in the area, have concrete property management arrangements and consideration-to-exit strategies.
These factors are important for sustaining long-term investment growth and overall returns.
Landlords are not alone. In light of the Prudential Regulation Authority (PRA) changes, which impact landlords’ cost of and ability to obtain funding, brokers should also add value to their clients by helping them to fully understand what they are getting into.
Since the beginning of October, a business plan has been introduced as a compulsory part of the application process for all professional landlords.
Among other things, this will involve an explanation of a landlord’s buy-to-let history and how they plan to manage their property. An understanding of the rental dynamics in the area in which they are operating is, therefore, crucial.
For example, if a landlord’s buy-to-let purchase is expected to be 60-odd miles away from their home, and they are proposing to take care of it themselves, the extra time and cost of travel needs to be acknowledged and properly managed. Consideration of ongoing taxation changes and their impact on landlords’ costs should also be kept in mind.
I’m not warning landlords against expanding their horizons to buy properties further afield. In fact, I’m doing the opposite. Our Rental Reports show that, at this time, the north of England is home to areas of fantastic growth.
However, it is important to proceed with caution and understand that while a good yield is clearly vital, there are other factors to consider, which are equally essential to building a robust portfolio and sustainable buy-to-let property business.