Is the market too hot to buy good value buy-to-let?

There’s an argument that the property market in the UK right now is too buoyant for many investors to make money from buy-to-let properties with so much completion from homeowners as well as investors.

So is the market too hot? In some areas, the answer is yes, but there are still some options.

Rental yields in some areas of the country – particularly the south – are as low as 4% for larger properties or 5%-6% for many standard homes. Averaged across the UK you can find yields between 6% and 7% but even that doesn’t leave much margin for the majority of investors to make money over the long-term once you consider financing, maintenance, tenant management and other costs.

When looking at investments that make sense over the longer-term it’s crucial to achieve a certain level of rental return.

As an example, where I’m based in the North West, a property costing more than £100,000 will typically give lower than an 8% rental yield – it’s usually closer to 6.5% to 7.5%.

On the flip side, you can find some properties that on paper that look like absolute no-brainers with rental yields of around 10%, but the reality is that these areas often suffer from more void periods, maintenance issues or arrears.

The magic number I always look for with a rental yield is around the 8% mark. That helps give enough margin to offset any of the inevitable costs an investor would expect to incur.

It also offers a cushion to guard against any rise in mortgage rates. As we’re still in a period of historic low rates, investors playing the long game need to consider an interest rate rise in their figures if using finance.

There’s also capital growth to think about. Many investors – experienced or not – will happily sacrifice some of their rental yield to enable them to purchase in traditionally high growth areas, in a bid to benefit from capital growth.

Short-term, this can and does work in the right situations, but if you want to grow a portfolio that is self-sufficient over the long term this can be a risky strategy, as capital growth isn’t guaranteed.

First and foremost, if you’re thinking of buy-to-lets, the property cash flow should cover all its costs and look after itself. If you have to put money in every month just to cover the mortgage, then it can be a very risky proposition as your relying on the market always rising.

So how do you find the best rental yields?

Adding value has and always will be one of the best methods to ensure you achieve the best return.

As an example, when I look at buy-to-let, I’m looking for properties that I can add some value to through a refurbishment and I’ll often negotiate a lower purchase price to give myself a higher potential yield.

By buying at the right price and in the right location, it’s possible to achieve properties closer to that 8% mark or above.

On top of this, I have seven golden rules I always follow to make sure each property fulfills a certain criteria. Everything from ensuring it’s in the right area to considering an exit strategy, rental yield to the tenant profile.

So what are the options if your looking for ‘long term’ buy-to-let?

There are still pockets of the country where it is possible to make a decent return from buy-to-let properties. For a long-term plan, the key thing any investor needs to remember is to focus on the tangibles that matter – rental income versus the outgoings of owning that property. 

Keeping the rental yield in mind is paramount and I find that 8% is usually right in the sweet spot.

This article was written by Robert Jones, a Manchester-based property investor and director of Property Investments UK.