Many landlords are still feeling the strain on their rental profits. Here are the different property types to consider if you want to increase your rental yields.
The latest research from Hamptons reveals that the annual pace of rental growth for newly let properties slowed again in the year to April, from 6.7% in March to 6.4% last month. However, even though rents aren’t rising as quickly, they are still increasing.
Rents increased 0.8% month-on-month, the largest rise this year. Hamptons comments that we’re unlikely to see the pace of rental growth slow much further. Furthermore, there’s a positive outlook; annual rental growth is set to level out at about 6%, a significant jump from the average growth rate of 2.5% recorded pre-covid.
However, mortgage cost increases have left many landlords feeling the strain when it comes to their rental income, making it essential to maximise your returns across your property investment portfolio with higher-yielding property types. In 2023, the average yield for vanilla buy to let properties was 6.22%, which you’ll see is much lower than that of other property types.
Below, we look at a variety of complex property types that may suit your property investment plans and the average yields you can expect to earn.
Have you considered these property types?
HMOs & Student Lets
HMOs and student lets are great opportunities to grow and diversify your property portfolio. It’s no surprise that many landlords set out to establish themselves in these areas, as the rental yields can be very attractive, and running them is similar to a standard buy to let.
HMO properties performed better than other complex property types last year, with average yields of 9.16% in Q4 2023*. With lower void periods and greater financial protection if one room becomes vacant, it’s understandable that these are a popular choice with landlords during this financially challenging time.
Demand for student lets continues to grow annually in line with the rising number of university students. Students typically live in HMOs with around 4-5 tenants, and location is usually the most critical factor. So, finding an HMO in a hotspot near the university campus will attract significant interest and allow you to charge higher rents.
Similarly, HMOs are in constant demand from students graduating from university, young professionals, and single-working professionals. Again, finding the right location to invest in will help drive up your rental yields.
For student lets and HMOs, lenders look for at least one year’s experience as a buy to let landlord, and most will offer rates from 75% loan-to-value (LTV).
Learn more about student lets and becoming an HMO landlord here.
Holiday Lets
Owning a holiday let can be a fantastic way to start diversifying your property portfolio.
The UK tourism and staycation industry has boomed since the pandemic, meaning demand for holiday let homes continues to grow. This shows in the average rental yields on offer; MFB clients benefited from average yields of 6.46% in the last quarter of 2023 but saw yields of 8.26% and 11.46% in the more active periods of Q1 and Q2.
The process of securing a holiday let mortgage is very similar to that of a buy to let. The property value, LTV, and achievable income will all impact the types of products you can access. It’s worth noting that buy to let and commercial lenders will assess projected income from holiday lets differently, so it’s worth working with one of our brokers to find the best loan to suit your needs.
Typically, lenders offer up to 75% LTV and want to see at least one year’s landlord experience on your application.
The legislation around holiday lets and short-term lets is changing, so it’s essential to stay up to date with the announcements when considering this property type.
There are several other factors to consider when investing in holiday lets, such as business rates and Stamp Duty Tax. Find out more about holiday lets here.
Multi-Unit Freehold Blocks (MUFBs)
MUFBs are properties consisting of multiple flats or units on one single lease. Due to their complex nature, with multiple ASTs in place and units on one lease, you will need a buy to let mortgage from a specialist lender. Again, lenders typically require at least one year’s landlord experience on your application.
MUFB rental yields consistently perform well; across Q3 and Q4 in 2023, our clients earned average rental yields of 8.63% and 8.43% on these property types, respectively.
Not only do MUFBs generate higher rental yields, but they also benefit from high tenant demand. This gives landlords a better sense of security and a reduced risk of financial void periods.
Typically, buy to let mortgage lenders allow up to six units/flats on one lease. You may need to secure a loan through a commercial mortgage lender for larger properties. As with standard buy to let mortgages, you’ll need a minimum deposit of 25% to access the more competitive rate pricing.
To learn more about MUFBs, click here.
Semi-Commercial Property
For landlords looking to diversify into the commercial property market, a semi-commercial investment is a fantastic place to start. Also referred to as ‘mixed-use’ property, semi-commercial property can be a great asset owing to the higher yields on offer.
In Q4 2023, our clients benefited from average yields of 9.13%. The busier market of Q1 last year saw semi-commercial properties generate average yields of 11.77%, showing just how well this property type performs. Another key benefit for landlords is the 3% stamp duty surcharge exemption, which considerably reduces purchase costs.
The commercial element of these properties typically means you will need a loan from a commercial mortgage lender. These lenders require you to have more letting experience, usually two years of residential buy to let experience and more than one investment property.
Most lenders have a minimum loan amount of around £50,000, with maximum loans of £25 million. Again, as with buy to let property, lenders typically allow you to borrow up to 75% LTV, but the property type and affordability calculations can restrict the loan size. Therefore, working with one of our commercial brokers who can help you secure the right mortgage product is essential.
For more on mixed-use property, visit our semi-commercial page here.
How to finance complex property types
Financing complex property types can be easy when you know how. The most important thing is to work with an experienced whole-of-market broker.
Our brokers will guide and support you through the entire process from start to finish. We can approach the lenders we know can offer on more complex property types to help speed up your application and search the whole market to find the best rate to suit your property finance plans.
To start exploring your options, contact our team of experts on 0345 345 6788 or submit an enquiry here.
*All yield data is based on MFB purchase and remortgage activity.
