If you want to make big returns on your buy-to-lets you need to let them out on a room-by-room basis, according to buy-to-let mortgage specialist Mortgages for Business.
The average yield for a home rented out as a house of multiple occupancy (HMO) – where each room is let individually – is 8.9%, according to the research.
In contrast, Mortgages for Business found that the average yield for a ‘vanilla’ buy-to-let where the whole property is let on one tenancy agreement was far lower at 5.6%.
The research also found that multi-unit rentals, such as a block of flats, offer an average annual yield of 8.1%.
This article is part of a wider series on investing, covering all areas from stocks and shares to buy-to-let, peer-to-peer and alternative investments. Click here to view the full guide.
However, the yield for HMO has dropped from 9% the previous year, something that shows its growing popularity, according to Jeni Browns, sales director at Mortgages for Business:
“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, I would suggest, is one of the main reasons we are seeing their yields drop, although, I suspect that the granting of fewer new HMO licences is also having an impact.”
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Landlords buying cheaper properties
The average value of a standard buy-to-let property – one where all the rooms are let under one tenancy agreement – purchased is almost 20% lower over the past 12 months lower at £375,409 compared to £305,283 in 2016.
One reason for this could be that the additional Stamp Duty rules mean landlords are looking for cheaper properties to invest in so that they pay less initial tax and potentially higher yields.
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Surging popularity of tax-efficient companies
The research also found that more and more landlords are buying properties through a limited company.
As we explain in this piece, investing via a company lets you benefit from significant tax breaks, including paying corporation tax rather than income tax, and still being able to deduct mortgage interest as an expense.
In the final quarter of 2016, only 31% of buy-to-let properties were bought through a company, but that had risen to 49% by the end of last year.
Of course, this strategy isn't suitable for all landlords. Read more about this rapidly-growing area in our guide BTL companies: a savvy move or mistake?
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