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Rising prices equals great returns for landlords

Rising prices equals great returns for landlords

Category: Buy To Let

Updated: 20/06/2014
First Published: 20/06/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Anyone that becomes a landlord generally has one goal in mind – to generate, or at least supplement, an income. Happily this needn't be a dim and distant dream as latest research from LSL Property Services has revealed that the typical landlord can achieve impressive annual returns, all thanks to a combination of increasing rents and rising property prices.

According to May's Buy-to-Let Index, rents in England and Wales rose by 0.6% over the month, a clear increase from the zero monthly change recorded in April. Annual increases remain gradual, however, with a growth rate of just 1.1% year-on-year, and unfortunately this hasn't been enough to counteract inflation, which measured 1.5% over the same period.

It also marks the 12th successive month that rents have been rising more slowly than inflation, with all of this meaning that in absolute terms, the average rent has risen by £8 year-on-year to currently stand at £745 per month, up from £737 in May 2013. It may not sound like a lot, but elsewhere in the figures it's a far more positive story…

Gross yields have steadied at 5.1%, the same as April's figure and slightly lower than May 2013 when typical gross yields were 5.4%, but despite this, total annual returns have reached a four-year high. Now posting a figure of 12.2% in the year to May, this is up from just 5.3% in the same period last year, and is now at the highest level seen since June 2010 when annual returns peaked at 12.4%.

In monetary terms, this represents a typical annual return of £20,133 in the last 12 months. A very tidy sum, helped largely by the increase in property prices, with this total return being made up of £8,107 from rent and £12,026 from capital gain. And, if rental property prices continue to rise at the same pace as they have been, the typical landlord could expect to make a total annual return of 13.4% (or £23,718 per property) in the next 12 months.

Of course, the lack of excessive rent increases is good news for tenants, hopefully meaning it won't put too much of a strain on their living standards, but it looks like it could be a very beneficial time for landlords too. This positivity has also been helped with a clear improvement in tenant finances – tenant arrears currently represent just 7.0% of all rent, compared to 8.2% a year ago – while void periods seem to be improving too, and that means it could be a great time to start, or expand, a portfolio.

A vital part of maintaining profitability as a landlord, however, will be securing the right mortgage deal. You don't want your rental income to barely cover your outgoings which makes this an essential part of portfolio planning, and luckily there are a lot of deals to choose from at the moment which should make it easier to find the rate (and therefore the repayments) that will suit your budget.

Moneyfacts' figures show that this level of choice is increasing too, with product numbers in the buy-to-let mortgage sector having risen by 41 in May to reach 607 – the highest figure seen since 2008, and one which is steadily rising. Finding that deal could be the first step on the path to becoming a professional, profitable landlord, free to enjoy the growing returns that are on offer in the sector.

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