HMO properties produced the highest yields in 2017, at 8.9 per cent – according to the latest buy-to-let index from Mortgages for Business.
But while this looks like an attractive investment for landlords, Mortgages for Business points out that yields on this type of property have fallen over the past year.
This is the first time since their Complete Buy To Let Index launched in 2011, that average yields on HMO property have been below 9 per cent.
Yields on multi-units, such as blocks of flats came a close second in 2017, generating an average yield of 8.1 per cent. This was also down on the previous year, where yields were 8.3 per cent.
In contrast yields on ‘vanilla’ buy-to-let properties generated a lower but more consistent 5.6 per cent return in 2017.
Mortgages for Business sales director Jeni Browne says: “The attractiveness of HMOs as a buy-to-let investment has increased in recent years, not only because of the higher yields on offer but because serious investors are keener to diversify their portfolios.
“With more landlords vying for these properties, prices have been pushed up more quickly than the rents, which is one of the main reasons we are seeing yields drop.”
She added that the fact fewer new HMO licences were granted may also be having an impact.
The average value of a vanilla buy-to-let property was £305,283 in 2017, a 19 per cent decrease on average values in 2016 (£375,409) according this data.
Browne says this indicates that landlords are seeking lower value properties. She adds anecdotal evidence suggests landlords are increasingly looking further north to purchase buy-to-let properties.
Browne says the benefits of this strategy include paying less stamp duty, future capital growth and scope for rental increases which may allow for slightly higher yields.
Whilst there was no change in the number of lenders operating in the sector in Q4 2017, the number of buy-to-let products in the market continued to rise.
Mortgages for Business says there has been a 444 per cent increase in the number of since 2011.
Browne adds: “It is widely anticipated that buy-to-let lending will contract this year in response to the tax and regulatory measures being imposed on the sector. I would expect product number to peak in Q1 2018, and we have already seen some lenders trimming their ranges leaving a core of products designed to reflect the changing needs of landlords.”
Source: Mortgage Strategy