In today’s challenging environment, increasing red tape, rising taxes, and higher borrowing costs mean that being a landlord is not for the faint-hearted.
If you are considering entering the market half-heartedly, relying solely on your capital investment to work hard for you, it may no longer be worth it.
From 2009 to 2022, low Bank of England interest rates (0.1%-0.75%) made BTL mortgages manageable, while UK property prices surged over 70% during this period, ensuring strong capital growth.
In contrast, 2024 presented a tougher landscape, with BTL mortgage rates around 5%, and rental yields failing to keep pace.
London landlords saw average yields fall, leading many to exit the market.
Shifting buying patterns
In response, landlords have been shifting to higher-yielding areas like the North of England, where rental yields reached 8.13% in 2024.
However, investing in high-yield locations without assessing property quality and local market risks can be costly. Poorly built developments in secondary locations have depreciated, undermining capital growth.
Given rising costs, including changes to tax relief and increased stamp duty, combined with the potential risk to capital growth, does an average 8.13% rental yield - with today’s cost of borrowing - make it all worth it?
In isolation, probably not.
Rather than gaining 3% gross income for all this effort and capital risk, we are seeing many part-time landlords turning to simple investments, putting their money back in the banks, and leaving it to work for itself.
For context, fixed-rate Cash ISAs offer tax-free returns between 4-5%.
Despite these challenges, we are starting to see a common strategy emerging the most amongst successful landlords. They appear to have concocted the winning formula needed to make worthwhile returns on both rental yields and capital gains:
• Targeting high-yield locations: As mentioned, investors are prioritising regions with stronger rental yields while carefully assessing property quality and micro-location
• Investing in higher-yield assets: Purchasing HMOs and semi-commercial properties, which often generate higher rental yields than a standard flat or house
• Property modernisation: Refurbishing properties enhances rental yields and capital appreciation. More landlords are now turning to value-add projects, rather than opting for ready-made, “off the shelf” rental investments
• Leveraging local knowledge: Understanding tenant demographics helps minimise vacancies and attract long-term renters. Knowledge of property prices prevents overpaying, ensuring yield calculations and capital appreciation are both maximised
• Full-time commitment: Hands-on landlords can better manage tenants (saving on management fees), pursue planning applications, and oversee refurbishments. This increased commitment and availability can lead to a better end product (the property), resulting in happier tenants and reduced turnover
• Tax efficiency: Ownership through a limited company can provide tax benefits, but it comes with additional administrative responsibilities. Seeking professional tax advice is essential and must not be overlooked
As with any formula, you need all elements put together for it to work.
The landlords supported by our broker partners who are implementing this approach are seeing rental yields of 10-14% per annum, alongside capital appreciation surpassing the UK’s average 4.6% yearly increase that we witnessed last year.
With many landlords exiting the market, competition is easing, and tenant demand is rising, providing remaining investors with better opportunities.
However, success demands dedication and a well-thought-out plan. With the Renters’ Rights Bill approaching, adapting to the evolving market is more crucial than ever.
