Buy-to-let property returns could soar to over 10%
Total annual returns from buy-to-let property in England and Wales could rocket to 10.7% over the next 12 months, equivalent to an annual return of £17,657 based on the average rental property price of £164,425.
Rising property prices in the first three months of 2012 have so far pushed the total annual return on a buy-to-let property to 5%, an increase from an average of 2.7% a year ago, according to LSL Property Services. This marks the highest yield since December 2010.
LSL believes that if house prices continue their upward streak – the property expert reports that house prices rose by 0.2% in March – then the average investor could pocket a yield of up to 10.7% in the year ahead.
Recent research from specialist lender Paragon shows that landlords in the North West benefit from the highest yields, earning a yield of 6.6% in the first quarter of 2012.
While landlords benefit from the housing market slump, there is little respite for tenants as the average rent dipped by just 0.3% in March, from a monthly average of £707 to £705 – a saving of just £2, according to LSL.
Despite this small monthly drop, rents continue to rise year-on-year, with the average tenant forking out 2.7% more for their home than last spring.
London continues to see the biggest increase in rental values, with the average rent up 4.9% year-on-year. Conversely, rents have only fallen in two regions – in the East Midlands and the North West, where rents are down 2.2 and 0.4% respectively over the past year.
David Brown, commercial director of LSL Property Services, admits that the small dip in rents is "likely to be shortlived".
"With the passing of the stamp duty deadline increasing the cost of moving, and banks' funding conditions likely to limit high value mortgage lending to first-time buyers, would-be buyers will be more reliant than ever on rented accommodation," he says.
This article was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.