- Landlords can secure close to double-digit returns
- Buy-to-let revenues have risen in some parts of the country
- Yields are eight per cent or higher in areas around Glasgow
Landlords could be getting close to double-digit returns with buy-to-let yields rising in some parts of the country, new Wealth & Personal Finance data has revealed.
Yields are eight per cent or higher in areas around Glasgow in Scotland, including West Dunbartonshire, Renfrewshire, East Ayrshire and North Lanarkshire. Renfrewshire saw revenues rise by 13 per cent in the last year alone, and West Dunbartonshire by seven per cent.
Even in parts of the country where returns are lowest, it is still possible to achieve a positive return, wealth data from property portal Zoopla reveals.
Yields in affluent London boroughs such as Kensington and Chelsea, Richmond upon Thames and Westminster are among the lowest in the country – all below 4.5 per cent. However, revenues in these regions rose by nine, 11 and 13 percent, respectively, last year.
Across the country, tens of thousands of buy-to-let landlords are selling their properties, as it becomes increasingly difficult to make a good return on properties. Higher mortgage rates are putting more pressure on landlords who are already suffering from increasingly burdensome regulations and a less generous tax system. About 40,000 cars have been sold over the past five years since value tax credits were withdrawn in 2018.
However, our numbers show that there are bright spots amidst this overwhelming darkness. Furthermore, as landlords sell their properties, it increases the scarcity of rental properties, helping to increase returns for those remaining.
In demand…the regions are witnessing sharp increases
The areas surrounding Glasgow have some of the most resilient returns thanks to a range of factors. Stephen McGlone, lettings director at Westgate Estate Agents, says: “Demand for rental properties is increasing with the University of Glasgow expanding rapidly and bringing in lots of new people looking for accommodation.
“Morgan Stanley and Barclays are increasing their workforce in the city, so there are a lot of employees looking for accommodation.”
McGlone adds that there is also demand for Airbnb rentals as Glasgow is a popular place to visit.
Ross McMillan, of Glasgow-based mortgage consultancy Blue Fish Mortgage Solutions, adds that although there are challenges in the area, as with buy-to-let across the country, landlords are doing well. “Landlords here are mostly flexible and keep their portfolios with a long-term perspective,” he says.
Toby Parslow, an analyst at property firm Savills, explains that areas with the highest returns tend to be those where property prices are lower, but where there is a strong job market and where some workers can afford relatively high rents. Parts of Scotland and areas such as Middlesbrough and Sunderland fit the bill, with the latter yielding 8.2 and 8.4 per cent respectively.
He adds that Glasgow in particular has seen “significant rental growth of 33.5 per cent since March 2020, while the number of new rental listings has fallen by 15 per cent, leading to increased competition”.
Related articles
How can this money help?
…But high returns aren’t everything
There are two main ways to make a profit from buying and renting: the income you earn from renting out a property; And the capital gains you can realize if its value increases.
Ideally, owners look for investment properties that can do both. No areas currently offer both, but individual properties do, says Vanessa Warwick, co-founder of landlord network PropertyTribes and a landlord herself. However, investors will have to do their homework to find them.
“Finding an area with high returns and high capital growth is the holy grail, but I’m not sure such a place exists,” she says. “Every location, every street, every property will have a different set of metrics that need to be researched and understood.”
Ashley Thomas, director of property brokerage Magni Finance, says investors should not necessarily shy away from areas with lower yields.
“Prime London will always have low returns, but properties in these areas have seen some of the strongest capital growth,” he says. “London continues to be seen as a resilient and lucrative market, especially for foreign investors.”
However, Warwick believes landlords should focus more on what they can achieve through rentals. “Return is money in your pocket that you can spend, whereas capital growth is speculative and takes many years to accumulate,” she says. “It shouldn’t be the main focus of most landlords unless they have significant other income.”
Why is it still difficult to make a profit?
A return nearing double digits may seem good at first, because it beats the best savings rates (now at about 6 percent) and average returns on stocks and bonds.
However, even for landlords who receive the best returns, the environment is still very difficult to achieve a good return.
In addition to the usual running costs affecting returns, landlords must invest to make sure their properties meet new minimum energy efficiency standards from 2028 – or face fines.
But perhaps the biggest pressure is rising buy-to-let mortgage rates. The average two-year fix was 4.04 per cent in August last year, but now stands at 6.64 per cent, according to data auditing firm MoneyfactsCompare. Landlords who remortgage properties see their profits dwindle.
“In August 2022, you can get a two-year no-fee fix at 3.89 per cent,” says Peter Gittins, product manager at L&C Mortgages.
“Today the equivalent product is 7.22 per cent, so for a £150,000 loan, that means payments have risen from £486 a month last year to £903 now.”
Louis Shaw, a mortgage broker at Mansfield-based Shaw Financial Services, believes rising interest rates make it impossible to make a profit from buy-to-let in most areas unless you own your investment properties outright or have a lot of equity.
“Unless you have a 50 per cent deposit, buy-to-let is considered dead in most parts of the country,” he says.
Some lenders are also tightening affordability rules for landlords, adding to the pressures. These rules require landlords to show they can pay a higher mortgage rate and then generate a higher income on top of that.
For example, last Wednesday, Santander raised its affordability rate by about one percentage point, from 7.59 percent to 8.52 percent. This means a landlord with a £100,000 buy-to-let mortgage will have to prove they have a rental income of £994 a month – up from £885 as a result of the changes. Imogen Spurle, managing director at London-based Finanze Property, said: “Contrary to popular belief, landlords are not rubbing their hands together in joy as they increase a tenant’s rent.
“They know that this is a difficult time for many and that a rent increase could cause them to lose their tenant completely.
“But not increasing the rent could make the property unmortgageable, meaning the only option is to evict the tenant and sell it.”
So, is buy-to-let still worth doing?
Although there are some great returns to be found, increasing numbers of owners are wondering whether it is worth the effort compared to other options available. When interest rates on savings were low, it was worth making the extra effort to get a much better return with a buy-to-let.
But now savings rates were at six per cent, and it no longer made sense to spend time finding tenants, fixing broken boilers and dealing with complicated taxes for an extra percentage point or two of income.
“Many of our clients look at the numbers and decide it’s not worth it, even if they are getting a reasonable return,” says Sean Robson, head of wealth planning at Killik & Co.
“Some landlords whose mortgage deals are expiring decide it’s a good time to sell up.”
Some links in this article may be affiliate links. If you click on them we may earn a small commission. This helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to influence our editorial independence.