Experts say "economies of scale" are behind the rise in rental yields for blocks of flats
“Houses of multiple occupation” (HMO) is no longer the biggest earner in buy-to-let.
So-called "multi-unit freehold blocks", which involve buying a block of flats or a converting a building into apartments, earnt investors 9.3pc in gross rental yields between October and December 2014.
These yield figures, based on thousands of actual transactions made since 2011 through leading buy-to-let broker Mortgages for Business, are “gross”. That means they don’t take into account costs such as servicing a mortgage, maintenance costs, ground rent – or add-ons such as letting agent fees and income tax.
The chart (below) compares rental yields across buy-to-let investment in blocks of flats, HMOs, and mainstream buy-to-let which usually involves a two or three-bedroom house or flat.
Investing in blocks of flats doesn’t come cheap. Prices start at around £500,000 for an eight-apartment building in a city outside London and £4m for the same size building in central London.
However, the average buyer’s budget for a block of flats has fallen in recent years. In early 2011, the average property price was £932,148 with a 44pc deposit. Now, investors pay £497,644 on average with a 36pc deposit.
Typically, landlords rent out the flats to individual tenants, charging rent for the individual flats and a ground rent.
Currently, investors can buy a converted Victorian home with eight flats in Nottingham, on the market for £475,000, which currently yields 7pc, according to online property portal Rightmove. A luxury development of 20 apartments in Canary Wharf, London, recently sold for £33m.
HMO will continue strong performance, experts say
HMO rental yields are higher than more traditional buy-to-lets, but returns have slipped over the past year. Slicing up properties for multiple occupants, where tenants share a living space but hold separate rental agreements, yields 1.4 fewer percentage points than at the same point last year.
Multi-unit flats are lucrative because of "economies of scale" and therefore may only benefit high value investors.
Meanwhile HMO remains popular with high demand from tenants. "For a multitude of reasons, not least stagnant wage growth for half a decade, many tenants simply can’t afford an enormous flat with a spare bedroom," Mr Whittaker said.
"As such, the attraction for many of renting a room rather than whole property will ensure that there is a steady yield-boosting demand for HMOs over 2015."
The average residential rent across England and Wales is now £767 per month, up from £745 in December last year, according to estate agent chains Your Move and Reeds Rains.
The gross yield on a typical rental property in England & Wales is 5.1pc, while the average capital gain amounts to £10,546.
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